Candlestick patterns are among the most widely used elements of technical analysis. For the uninitiated, a candlestick is one that depicts the daily opening and closing prices, apart from the high and low, for a specific time frame. The candlestick is depicted in three components: the body and the two shadows. The shadows are lines that are above and below the body of the candlestick. The upper shadow is called the wick and the line below is called the tail.
Before getting into the nitty-gritties of candlestick patterns, any beginner has to learn how to read single candlesticks. A candle that is bearish has the open price higher than the closing. A candle that is bullish has an open price that is always lower than the closing price. Every candlestick is typically representative of a single day, so there are 15 candlesticks in a 15-trading day period. Unlike a single candlestick, multiple candlestick patterns emerge after two or more trading days.
Although there are several candlestick patterns to depict movement of prices and trends, the key among them is the breakaway candlestick pattern. Breakaway is the term used to indicate a reversal of trend. It consists of five candles and depending on the height and locations of each one of these candles, traders can predict if there is a bearish or bullish reversal of trend over the short term.
What is a bullish breakaway candlestick pattern?
The bullish breakaway pattern has five bars and the nature of this pattern can be interpreted thus:
- The market sentiment is largely bearish, as indicated in the first bar. This first bar is long and bearish.
- The bearish sentiment prevails in the form of the next three candlesticks although they are smaller. This is indicative of the bears losing a bit of the fight or to put it differently, the bearish trend is getting diluted.
- The final reversal comes in the last bar, which pushes through the trend of the last three bars, and breaks away. It turns bullish and indicates that the market sentiment may be in favour of the bulls.
If you want to act on this pattern, make sure it occurs at the time of a downward trend over the short term. The pattern gains significance in an oversold market. You should check for a confirmation of Day Six, in the form of a bullish candlestick.
What is a bearish breakaway candlestick pattern?
The bearish breakaway candlestick pattern has five bars and is seen as the flip of the bullish breakaway. This pattern occurs at the time of an uptrend.
- The first candle is a tall one and is indicative of a bullish market.
- The second candle can be long and creates a gap as the price opens on a higher level.
- The third can be either bullish or bearish but it doesn’t cut off the increase in price level.
- The fourth candle retains the same trend of the third one.
- The fifth bar, on the other hand, breaks away, and turns into a bearish one, thus changing the direction of the trend.
Some points to remember on breakaway patterns
- Sometimes there could be groups of breakaway patterns at the bottom of trends. Several of these patterns are not necessarily breakaway and could just be false indicators that appear during times of volatility or just before a market begins to turn.
- For both bullish and bearish breakaway candlestick patterns, the first day is a long bar and is always in continuation of the existing trend. The second day’s candle is also the same colour as Day One. On the third and fourth days, the closes continue the preceding trend but on the last day, the candle in the opposite trend appears.
Candlestick patterns are versatile and can be used in most market conditions to assess price trends and movements. A breakaway candlestick pattern shows an emergence of the opposite trend on the fifth day, after beginning the first day in the prevailing trend. These could be both bearish and bullish candlestick patterns and can be used by traders to get a better idea of the markets and trend reversals.