Understanding the significance of candlestick patterns for technical analysis is crucial since they provide valuable insights into the price movements of securities. We will explore the significance, development, and trading approaches associated with the bearish breakaway candlestick pattern among the various available candlestick patterns.
These patterns assist traders in predicting the direction of security, enabling them to identify optimal buying and selling opportunities and develop effective trading strategies.
Bearish Breakaway Candlestick Pattern – Definition
The bearish breakaway candlestick pattern is a reversal pattern that typically forms at the end of a bullish trend.
The Bearish Breakaway is a pattern of five candlesticks that appear during an uptrend, indicating a potential change to a bearish market. The pattern starts with a large bullish candlestick, followed by several smaller bullish candlesticks. It ends with a large bearish candlestick that exceeds the range of the previous candles.
Note: If you want to learn Candlesticks and Chart Trading from Scratch, here’s the best book available on Amazon! Get the book now!
Bearish Breakaway Candlestick Pattern – Formation
The pattern comprises the following candles:
- The first candle is a large green candle.
- The next green candle opens with a gap above the closing price of the first green candle and is followed by two smaller green candles.
- The final candle is a large red candle that opens gap down and closes below the prior three red candles
The appearance of this pattern suggests that the buyers are losing control and the sellers have gained momentum in the market and potentially a bearish reversal.
Bearish Breakaway Candlestick Pattern – Psychology
The psychology behind the bearish breakaway pattern is that it signals a shift in market sentiment from bullish to bearish.
The first long bullish candle indicates strong buying pressure, but the subsequent smaller bullish candles suggest that the bulls are losing control and the uptrend is weakening. The final large bearish candle breaks away from this trend, indicating that the bears are gaining power and the market sentiment is shifting in their favor.
As a result, this pattern serves as a warning sign for the conclusion of a bullish trend and the emergence of a bearish trend. This pattern is often seen in overbought market conditions, where the market is due for a reversal.
Bearish Breakaway Candlestick Pattern – Trading Ideas
In a strong prevailing uptrend, the formation of the Bearish Breakaway pattern indicates the end of a bullish trend and the start of a potential bullish reversal. Here, a short position in security is preferred.
Entry:- Enter a short position in security below the closing price of the final candle of the pattern formed.
Stop loss:- The stop loss is simple for the pattern, the high price of the pattern formed can be set as a stop loss for the good risk-return ratio.
Profit Target: The profit targets can be set to the next level of support from the position’s entry. Also, the profit target depends based on one’s risk-reward evaluation.
Furthermore, one can use this pattern one can also use the bearish breakaway candlestick pattern as a means to exit a long position as the pattern suggests the end of an uptrend.
Also read…
Bearish Breakaway Candlestick Pattern – Example
In the above chart of Wipro Ltd., we can observe the formation of the Bearish Breakaway candlestick pattern at the end of an uptrend. As discussed in this article, the price saw a change in trend from bullish to bearish after the formation of the pattern.
At the time of the formation of this pattern, a trader could have taken a short position when the price of the stock started trading below Rs. 206 and the stop loss was at Rs. 213.
Bearish Breakaway Candlestick Pattern – Limitations
While the bearish breakaway pattern indicates a powerful reversal signal, it is not always accurate so traders should be aware of its limitations:
- The pattern’s effectiveness may vary depending on market conditions; it can be more reliable in trending markets than in range-bound markets.
- The pattern requires five consecutive sessions (or candles) to form, which may result in a delayed entry.
Conclusion
The Bearish Breakaway candlestick formation holds significant value for traders aiming to recognize possible bearish turnarounds. Traders can improve their decision-making and risk management by comprehending how it forms and its potential ramifications.
Like any other technical analysis tool, it is crucial to pair this pattern with other indicators and analysis techniques to validate signals and bolster trading strategies.
Written by Deepak
By utilizing the stock screener, stock heatmap, portfolio backtesting, and stock compare tool on the Trade Brains portal, investors gain access to comprehensive tools that enable them to identify the best stocks, also get updated with stock market news, and make well-informed investments.
Start Your Stock Market Journey Today!
Want to learn Stock Market trading and Investing? Make sure to check out exclusive Stock Market courses by FinGrad, the learning initiative by Trade Brains. You can enroll in FREE courses and webinars available on FinGrad today and get ahead in your trading career. Join now!!
