The breakaway Gap strategy

Description

The Breakaway Gap strategy is described and used by the German trader Harald Weygand in the book “Das große GodmodeTrader Handbuch 2”.

The strategy focuses on breakaway gaps. A gap is a big price movement, with little or no trading volume in between. A breakaway gap is a gap, which moves through a support or a resistance level and/or an important moving average level.

These are advantages of the Breakaway Gap strategy:

1. Developed by a well-known trader.
2. Based on one clear concept.
3. Can be used on all instruments.

Suitable for	: Market indices (DAX, DOW, CAC…) : Forex (EUR/USD…) : Commodities (oil, gold…) : Stocks
Instruments	: Futures, CFD-Forex, stocks
Trading type	: Daytrading and swing trading
Trading tempo	: Variable
Using NanoTrader	: Manual or (semi-)automatic

The strategy in detail

Breakaway gaps often occur at the start of a trend after a consolidation phase or after a trend reversal. They are very useful to find instruments, which are starting a new bullish or bearish trend. The combination of a gap and a break-out is particularly powerful and perfect for finding fast-moving instruments.

Harald Weygand’s strategy automatically detects price gaps which exceed a certain size and which break through at least one of four moving averages. The Breakaway Gap strategy is mainly used as a swing trading strategy in daily charts but traders can also experiment with smaller time-frames.

When to open a position?

A long position is bought at the market price if an up-gap occurs which breaks above a moving average. A short position is opened at the market price if a down-gap occurs which breaks below a moving average.

This example shows a breakaway gap. A buy signal (green triangle) was given after the market opened with an up-gap above the upper moving average (red line).

When to close a position?

Harald Weygand’s Breakaway Gap strategy uses a profit target and a stop loss to protect the position. The stop loss is placed at the lowest (highest) price of the last three periods. The profit target is placed in a distance which is equal to 2-times the risk. This is a return/risk ratio of 2 to 1.  The distance to the stop is red in the chart. The distance to the target is green.

This example shows another breakaway gap. A short sell signal (red triangle) occurred.  The stop loss is the high of the last three candles. The profit target is two times this risk. The profit target is reached and the position closed with a profit.

This example shows a buy signal (green triangle) after a breakaway gap. The stop loss is the low of the green candle preceding the up-gap. The profit target is two times this risk. After four weeks the position reaches the target and is closed with a big profit.

Practical implementation

Using the NanoTrader follow these steps:

• Open the chart of the instrument you want to trade.
  

• Select the template study "WHS Breakaway Gap” in the "WHS Strategies" folder.

• If required, adapt any parameters as described above.

• For semi-automated trading, activate TradeGuard+AutoOrder in the chart. For automated trading, activate AutoOrder in the chart.