Break away Gaps are powerful

Summary

This video explains the concept of breakaway gaps in trading, focusing on how price movements leave behind fair value gaps that are rarely filled immediately. A breakaway gap occurs when the third candle in a three-candle pattern closes above the second candle’s high, signaling a low probability of the gap being filled. The video also discusses how price targets drive these movements, emphasizing the importance of understanding probability and price behavior to make successful trades. This is the first video in a series designed to help traders recognize and use breakaway gaps for improved trade entries.

Takeaways

• 😀 Breakaway gaps occur when price forms a fair value gap but does not fill it immediately, indicating strong momentum in the price direction.
• 😀 A fair value gap is identified by a three-candle price action: the first candle sets the start, the second creates the gap, and the third closes above the second's high.
• 😀 The third candle closing above the second candle’s high is the key indicator of a breakaway gap.
• 😀 When a breakaway gap is formed, the chance of price returning to fill the gap is low, around 20%.
• 😀 Breakaway gaps suggest that the market is targeting a specific liquidity level, and price will continue in that direction until it reaches the target.
• 😀 Price behavior after a breakaway gap is essential: if the gap isn’t filled, the price likely continues in the direction of the gap.
• 😀 Traders should focus on probability, as breakaway gaps provide high-probability trade entries, with the price expected to continue moving in the gap’s direction.
• 😀 The concept of breakaway gaps is target-oriented—price doesn’t typically reverse to fill the gap until the target is reached.
• 😀 A breakaway gap is part of a high-frequency trade entry model, where quick trades are entered based on the momentum signaled by the gap.
• 😀 If price fails to close above the previous candle's high, it increases the chance of the gap being filled, suggesting a reversal or slower movement.

Q & A

What is a breakaway gap in trading?

A breakaway gap is a type of fair value gap where price does not return to fill the gap immediately, indicating a strong price movement towards a target. These gaps are typically identified by the price action around them, such as when the third candle closes above the high of the second candle.

How do you identify a fair value gap?

A fair value gap can be identified using three candlesticks: the high of the first candle and the low of the third candle. The distance between these two points forms the fair value gap.

What indicates that a gap is a breakaway gap?

A breakaway gap is identified when the third candle closes above the high of the second candle in a three-candle price action setup. This suggests a strong buying pressure, and the likelihood of the gap being filled is very low.

What happens when price closes above the high of the second candle in a three-candle pattern?

When price closes above the high of the second candle, it indicates a breakaway gap, meaning price is less likely to return to fill the gap and will likely continue in the direction of the target.

What is the relationship between breakaway gaps and price targets?

Price targets are always a key factor in breakaway gaps. Once a breakaway gap is formed, the price is focused on reaching the target, and it is unlikely to return to fill the gap until the target is achieved.

Why does price not immediately return to fill a breakaway gap?

Price does not return to fill a breakaway gap because the market is targeting a higher liquidity level. This means price will continue moving toward the target, rather than retracing to fill the gap.

How does the concept of a breakaway gap relate to trading entry models?

The concept of a breakaway gap is important for creating high-frequency trading entry models. Traders can use the gap as a signal that the price is likely to continue in the direction of the gap rather than retrace.

What is the probability of price returning to fill a breakaway gap?

The probability of price returning to fill a breakaway gap is very low, with estimates often given as only 20% out of 100. This is due to the strong buying or selling pressure around the gap.

What does it mean when price fails to close above the high of the second candle?

When price fails to close above the high of the second candle, the gap is less likely to be a breakaway gap. In this case, the price is more likely to come back and fill the gap before continuing its move.

Can breakaway gaps be used for short-term trading?

Yes, breakaway gaps are useful for short-term trading, as they indicate strong price movement towards a target. Traders can use these gaps to time entries for high-probability trades.