Breakaway gap formations occur at the beginning of a new trend, usually at the end of long consolidation periods. They may also appear after the completion of some chart formations that tend to act as short-term consolidations. Breakaway gaps signify a brisk change in trading sentiment, and they occur on increasingly heavy trading.
Traders are understandably frustrated by consolidations, which are rarely profitable. Therefore, a breakout from the slow lane is embraced with optimism by the profit-hungry traders.
The price takes a secondary place to participation. As always, naysayers follow the initial breakout. Sooner rather than later, the pessimists have no choice but to join the new move, thus creating more volume.
Breakaway gaps are not likely to be filled during the breakout and for the duration of the subsequent move. In time, they may be filled duringa new move on the opposite side.
In Figure below, the currency futures trades sideways in a 100-pip range between 0.6550 and 0.6690 for a period of time. A price gap between 0.6690 and 0.6730 signals the breakaway from the range.
Finally, the breakaway gap provides only the price direction. There is no a price objective. However, an increasing demand for a currency ensures a solid move on good volume in the foreseeable future.
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