Hi friends, and welcome to this podcast by Angel One.
Today, we are learning another cool candlestick pattern. Do you want to know which one? Of course, of course. But before that, listen to this cool story.
Sara had started trading only a couple months back. She began by diversifying and investing in three securities. While two performed well, the third one did not.
It’s price kept sprawling downwards for four straight days. On the fifth day, Sara saw a good upward movement and decided not to exit.
But the price continued to fall downwards. Sara was not in trouble, because she had already safeguarded herself by investing in some growth stocks.
While some say that you should find a profession where your passion takes you, that is not a very good idea in the case of stocks. Sara stuck with her investment because she didn’t want to admit that the loss had happened and she should back off.
There is a candlestick pattern that can help you do exactly what Sara wanted to - to predict if the prices will actually change the direction. And it’s called the breakaway pattern. Terminology is simple - ‘breakaway’ pattern simply indicates as to whether a security will ‘break’ ‘away’ from the existing downtrend or uptrend. Reasoning is the same, directions can be different.
That’s why there are two types of breakaway patterns - these are called the bullish breakaway and the bearish breakaway pattern. And as you might have guessed, the bullish breakaway pattern tells you if a security’s price will reverse in direction after a downtrend.
Let’s look at the finer details. Keep in mind, that we are now talking about a bullish breakaway pattern. Which means . . . guess what?
That’s right - the bullish breakaway happens after a downtrend. It consists of 5 bars, the first one of which indicates a bearish sentiment of the market. Therefore, the first candle is a long black one.
This is where the interesting part begins.
After the first candle, the bullish breakaway consists of three small black candles, indicating a conflicting sentiment at play. This is followed by a down gap between the first candle.
This simply means that you can spot a gap between the low of the first long bearish candle and the high of the second candle. This indicates a strong bearish sentiment, and that there is an extraordinary interest in selling rather than buying.
Gaps are studied within the domain of what’s called gap analysis. But that’s for another time. Let’s return to our topic.
So the middle three candles indicate an ongoing bearish sentiment, but also that the bulls are already fighting back.
The last candle, which is finally a long bullish one, should push past the high of the last three candles in order to complete the bullish breakaway pattern.
Okay, cool. So does this mean that you can expect a reversal the next day?
Experienced investors generally wait for the sixth day in order to infer the signal as a confirmation of a successful reversal, because bullish breakaway patterns are generally associated with almost 60% accuracy.
Now, the bearish breakaway pattern is exactly the opposite. Let’s see how.
First, the bearish breakaway occurs during an uptrend, and this is confirmed by the first candle, which is usually a long bullish one.
This is followed by an up gap - meaning that you can spot a gap between the high of the first candle and the low of the second candle.
Following the gap, you can see three small bullish candles, which indicate an ongoing bullish sentiment. However, the security is already facing resistance, and the bears are fighting back.
This can be seen in the fifth candle, which pulls the prices to below the opening of the second candle.
The bearish breakaway statistically performs slightly better than the bullish breakaway, although only marginally - by about 3%.
So now that you know what bearish and bullish breakaway patterns are, what next?
Next, we will look at some points for you to remember in this context.
Number one. When you look at the bottom of downtrends, you can often spot a lot of bullish breakaway patterns. This means that not all bullish breakaway patterns actually manage to break through the support or resistance. Therefore, you should always take the breakaway pattern with a grain of salt.
Number 2. If the ups and downs confuse you, and if you are new to candlesticks, here is a simple way of remembering the breakaway patterns - both bullish and bearish breakaway patterns consist of first 4 candles of the same colour - the first one is long, followed by a gap between the first and second candle, followed by a long fifth candle of the opposite colour. Simple, right? That’s why you should take note of that sentence.
However, trading solely on the basis of patterns is not a very good idea. This is because patterns are not always correct in predicting the outcome of a specific market situation.
Technical and fundamental analysis are your friends, get closer friends with them. The patterns can alert you to significant events, but then you should investigate further, before jumping the ship.
Friends, that is all we have for today’s podcast. If you want to learn more about stocks, the market, or about investing, do not forget to visit www.angelone.in.