Breakaway price gaps often indicate that a given asset is in the throes of a sustained breakout from a trading range.
Such gaps can be either a bullish or bearish signal, pointing to a change in investor sentiment, especially following significant news flow.
Common price gaps tend to be relatively small in comparison to breakaway gaps. For instance, a stock may open at only a slightly higher level than it previously closed at.
In the case of a breakaway price gap, we should see the next price on the candlestick chart at a significantly different level.
This gap is less likely to correct itself in the following trading sessions as with a common price gap, but rather could be the beginning of a new bullish or bearish trend.
With a true breakaway price gap, we should observe some increase in trading volume following a period over which the asset has been stuck in a trading range.
At the top of the area of the recent trading range, the peak price points of this phase indicate the price level around which the asset has come under selling pressure, and so equate to a line of resistance.
At the bottom, the trough price points denote a price level where buyers have come into the market to take advantage of more attractive prices, and so is a line of support.
As the price has been hemmed in this trading range for some time, it will take a significant change in sentiment to push it over either the upper or lower line of the range.
When a breakaway price gap occurs, and it is accompanied by higher trading volume, we can take a position in line with the same direction of the gap.