A breakaway gap indicates that a new trend is being created. All binary options traders ought to learn how to spot such important occurrences. This is particularly true for trend followers who can profit greatly from being able to recognize when a trend is about to occur as early as possible. Learn all about trading breakaway gaps here.
A gap is defined as an empty space that falls between two events or periods. In the case of a price chart, a gap can occur when the market skipped suddenly from one price to another. The leap was caused either as result of an unexpected surge in supply or demand. An increase in supply will create a downwards gap, whereas an increase in demand will cause an upwards gap.
Gaps are important events of great significance for technical analysts. The surge in supply or demand could suggest that the market sentiment is going through a major change. If this change influences the market over time, it can result in a new trend, or stop or strengthen an ongoing trade. In order to ascertain which event will in fact occur, you have to find out what sort of gap has been produced.
The breakaway gap happens when the market is moving sideways. This means that the market could be in a reversal pattern or a continuation pattern. It is also possible that a trend has stopped and the market is still unsure where to move next. When gaps occur within such an environment during a period of high trading volume, it is probably a breakaway gap.
That there is a high trading volume suggests that a large number of traders share the underlying change in market sentiment that resulted in the gap. This indicates that the surge in supply or demand will influence the market for a considerable timespan.
The conclusion is that you can expect a new trend to arise as a result of a breakaway gap. So how do you identify and start trading breakaway gaps?
You can rely on various technical indicators in order to identify periods when the market is in a sideways movement. The moving average will, for example, change direction very frequently, during sideways movements. For this reason, you ought to monitor the moving average, using either your trading software or by keeping your eyes on your price chart.
If you see that the moving average has changed its direction more than a couple of times during the most recent periods, it is likely that the market is moving sideways. For this approach to work, you should a mid-range amount of periods for the moving average. If you use a short timeframe for your chart, you need to use fewer periods.
In order to make the detection of sideways movement more precise, you might want to employ several different moving averages at the same time. Use different amounts of periods for these moving averages. The line of reference will be generated by the longest of these moving averages. You need to ensure that this moving average has a lot more periods than the others.
When the market is in a trend, all the shorter moving averages ought to be on the same side of the longest moving average. However, when the market is defined by sideways movement, these shorter moving averages will be scattered on all sides of the long moving averages. If you are creating an automated trading system for yourself, this method might come in very handy. For manual traders, it is usually easy to determine the absence or presence of a trend by looking at a price chart.
The fact that a breakaway gap suggests the beginning of strong market developments that will cause the creation of a new trend, makes breakaway gaps highly significant events. Both trend followers and swing traders can make binary options investments based on breakaway gaps.
In the case of swing traders, they should endeavor to take advantage of the first strong movement the breakaway gap causes. They can do this by either investing in a high / low option with a short expiry time relative to the chart’s timeframe, or a touch option.
The advantage of investing in a high / low option is the higher win percentage. The advantage of a touch option is that it will offer a greater payout. There is money to be made either way. Should you have a preference for trading on the whole trend, your best chance is to invest in a high / low option with an extended expiry time. Preferably more than 10 periods.
If your binary broker offers a touch option with a long expiry, and a target price that is quite far off from the current price, this could be a promising investment opportunity. By using technical indicators like the average true range you can estimate whether or not the market is capable of attaining the target price. Beware, however, that after the breakaway gap the market will probably pick up momentum.