Bullish Breakaway Explained & Backtested (2023)

The bullish breakaway is an extremely rare five-bar Japanese candlestick pattern that suggests future bullish price action, according to extensive historical backtesting.

The pattern occurs too infrequently in all markets on the daily charts to produce statistically significant results.

The data hints at the bullish breakaway pattern being one of the few candlestick patterns that work as advertised.

But the fact that the pattern both produces profits and works as intended means it might make sense to learn this pattern so you can analyze it on other timeframes.

With this in mind, let’s continue!

What Is a Bullish Breakaway Candlestick Pattern

Bullish Breakaway Candlestick Pattern Illustration © Analyzing Alpha
Bullish Breakaway Candlestick Pattern Illustration

A bullish breakaway pattern is a bullish reversal pattern. It gets its name from the last candle breaking away from the prior trend. 

The pattern seems to hint at producing profits in the stock market. And while this isn’t surprising, as the stock market does have an upward bias, the pattern still shows promise. 

Speaking of candlestick charts, let’s learn how to identify this rare five-bar pattern.

How to Identify the Bullish Breakaway Candlestick Pattern

Bullish Breakaway Candlestick Pattern on the Agree Realty Corporation (ADC) November 2nd, 2020 daily chart
Bullish Breakaway Candlestick Pattern on the Agree Realty Corporation (ADC) November 2nd, 2020 daily chart

The following are the requirements for a valid bullish breakaway pattern:

  • The first candle must be a long bearish candle.
  • The second candle is bearish and gaps down.
  • The third candle must have a lower low and lower high than the second.
  • The fourth candle is bearish and must have a lower low and lower high than the third.
  • The fifth candle must be bearish and closes the second candle’s gap.
  • The bullish breakaway must occur in a downtrend.

We can see the bullish breakaway on the Agree Realty Corporation (ADC) daily chart on November 2nd, 2020.

Price is in a bearish trend and below the fifty-day moving average. We see a large bearish candle moving toward the downtrend on the first bar—price gaps down on the second day. The third bar is bullish but with a lower high and lower low than the second. The fourth candle is bearish with a lower high and lower low. And the fifth day closes the gap with a long bullish candle.

Now that we can identify these five candle breakaway patterns, how should we trade them? 

How to Trade the Bullish Breakaway Candlestick Pattern

The bullish breakaway patterns should not be traded due to insufficient data.

For those who don’t care about statistical significance, this data hints that the pattern should be traded as intended using a bullish reversal trading strategy expecting a longer-term trend reversal.

Let’s learn how traditional trading and investment advice recommends making money on this pattern.

Bullish Breakaway Bullish Reversal Trade Setup

Bullish Breakaway Bullish Reversal Trade Setup on the Fiserv (FISV) October 14th, 2021 daily chart
Bullish Breakaway Bullish Reversal Trade Setup on the Fiserv (FISV) October 14th, 2021 daily chart

We can see the breakaway pattern on the Fiserv (FISV) daily chart on October 14th, 2021.

Market sentiment is bearish as we see that price is below the fifty-day moving average.

The first bar is a bearish candle in the prevailing trend direction. The second candle is a large black candle with a gap between the first two candles—the third and fourth days both print lower highs and lower lows. The fifth candle is a large bullish candle with an upward gap.

With the five candles and the downward trend identified, let’s learn how to trade this pattern as a bullish reversal.

Traders enter long at a break of the fifth candle’s high with a stop loss set below the low of the fourth bar.

Using the example above, we would open a position the day after the bullish breakaway candle on October 15th, 2021. There was a body gap, causing an entry at $108.55, above the fifth day’s bullish candlestick high of $108.02.

But for those interested in optimizing this potential trading pattern, the best entry is to go long at the break of the fifth candle’s close with a stop loss below the fourth candle.

What does the past performance of these five candlestick patterns using these strategies look like?

Does the Bullish Breakaway Candlestick Pattern Work? (Backtest Results)

Using the following rules, I backtested the bullish breakaway on the daily timeframe in the crypto, forex, and stock markets.

  • A close above the 50-day SMA constitutes an uptrend.
  • I tested risk-reward ranges from 1 to 5. 
  • The optimal risk-reward ratio is selected using profit per bar.
  • Entry and exits are discussed in the how-to trade section above.
  • Confirmation must occur within three days of the pattern signal.

Similar Candlestick Patterns

Multiple candlestick patterns are often confused with the bullish breakaway. It’s essential to understand the differences when using candlestick pattern technical analysis.

Bearish Breakaway vs. Bullish Breakaway

Bearish Breakaway Candlestick Pattern © Analyzing Alpha
Bearish Breakaway Candlestick Pattern

The bearish breakaway candlestick pattern is a mirror of its bullish cousin. Both chart patterns are reversal patterns, but the rules are reversed.

For example, the bearish breakaway occurs in an uptrend expecting a bearish price swing, while the bullish occurs during a downtrend expecting a trend reversal for the bulls. 

The first candle of the bearish breakaway is a long black candle, while the bearish is a white candle—the second candles both gap in the direction of the trend. The third and fourth candles make higher highs and higher lows in the case of the bearish pattern, while the third and fourth trading days make lower highs and lower lows for the bullish. And finally, the last day is a long black candle for the bearish reversal and a long white candle for the bullish.

Bearish Three-Line Strike vs. Bullish Breakaway

Bearish Breakaway Candlestick Pattern © Analyzing Alpha
Bearish Breakaway Candlestick Pattern

The bearish three-line strike is a four-candle pattern with the first three bars moving towards the downside, with the last bar reversing the price action. And the bullish breakaway requires five bars with four bars to the downside, with the last changing the price action.

Now here’s the kicker.

The bearish three-line strike expects a bearish continuation, while the bullish breakaway expects a reversal.

With these patterns being so similar, why are they supposed to trade in different directions? Good question.

The key is in the candles.

The bearish three-line strike has relatively constant selling pressure that typically leads to an oversold market and a mean reversion play, but this consistency hints towards more downside.

The bullish breakaway doesn’t necessarily have to have three consecutive bearish candles. We’ll often see bullish candles relieving some of the oversold condition, and on average, the best bet is to buy the dip in the stock market.

The Bottom Line

The bullish breakaway candlestick pattern is considered a reversal pattern, and the data does hint toward this direction. But unfortunately, the pattern infrequently occurs, so we can’t use history to guide this pattern’s future results.

Personally, that’s too high a risk for me, and I think inventors and traders should pass on these and trade only the top candlestick patterns.

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