Breakaway gaps are strong signs indicating the creation of a new trend. Every binary option trader should know how to recognize these significant events. Especially trend followers can profit from recognizing the creation of new trends early.
What is a breakaway gap?
A gap is a void between periods. The market did not move smoothly up or down, but jumped from one price level to another. This jump was created by a sudden surge in supply (in case of a downwards gap) or demand (in case of an upwards gap).
A gap is a significant event any technical analyst should notice. The strong overhang of supply or demand could indicate a fundamental change in market sentiment. Should this change influence the market for the future, it could create a new trend, end an existing trend, or make an existing trend accelerate. To know which of these events will happen, you need to be able to determine which type of gap you are dealing with.
The breakaway gap occurs during a period of sideways movement. The market is either stuck in a continuation pattern or a reversal pattern, or the previous trend has ended and the market is trying to figure out where to go next. If a gap in that kind of environment is accompanied by relatively high volume it is very likely a breakaway gap.
The high volume indicates that a significant number of traders support the change in market sentiment that is indicated by the gap. Therefore, the overhang of support / demand is likely to dominate the market for quite some time.
Therefore, you can expect a breakaway gap to create a new trend.
How to find breakaway gaps
Breakaway gaps occur during periods of sideways movement. To make detecting market environments that make the creation of breakaway gaps likely, you can use technical indicators. To detect a sideways movement, you can use a moving average. During periods of sideways movement, a moving average will change direction often. Therefore, you could either monitor a moving average visually or with your trading software.
If the moving average has changed direction twice or more often over the last periods, the market is likely in a sideways movement. To use this method effectively, make sure to use a middle-range number of periods for your moving average. The shorter you choose the time frame of your chart, the fewer periods you should use.
To detect sideways movements more accurately, you could use a combination of different moving averages. Make sure to use different numbers of periods for each moving average. The longest of your moving averages creates the line of reference. Make sure that this moving average uses significantly more periods than the other moving averages.
In a trend, the shorter moving averages should all be to the same side of the longer moving average. In a sideways movement, however, the shorter moving averages will be to all sides of the longer moving average. This method is especially useful for traders creating their own automated trading system. Manual traders can easily determine the market environment visually.
How to trade breakaway gaps
Breakaway gaps indicate the beginning of a strong movement that will eventually create a new trend. This is a significant indication trend followers and swing traders can use to invest in a binary option. Swing traders should try to benefit from the initial strong movement created by the breakaway gap. To do this, they could either invest in a high / low option with a short to medium expiration time in relation to the time frame of the chart (2 to 5 periods), or in a touch option.
Investing in high / low options should generate the higher winning percentage, while touch options generate the higher payout. Both strategies can make you money. If you prefer to trade the entire trend, you should use a high / low option with a long expiration time (>10 periods).
Should your broker offer you a touch option with a long expiration time and a relatively far away target price, this might be a solid investment, too. Use technical indicators such as the average true range to estimate whether the market can reach the target price. Keep in mind, though, that the market is likely going to pick up momentum after the breakaway gap.