Since the 18th century, traders in Japan had been using candlestick charts to track data. An essential part of interpreting candlestick charts in modern times is learning to trade all the patterns, such as the Bullish/Bearish Abandoned Baby patterns. Byt, what really is an Abandoned Baby pattern in candlestick trading?
The Abandoned Baby is a bullish or bearish reversal pattern seen in candlestick trading. It is indicated by:
- An established upward or downward trend, followed by:
- A first candle with a large real body
- A second candle which is a doji and gaps the other two candles
- A third candle which reverses the trend and opens higher/lower than the second
That’s the basic breakdown, but as with all things candlestick trading there is much more to learn before you can effectively trade an Abandoned Baby pattern. Further in this article, we’ll cover its types, how to identify it, how to increase its reliability, and even strategies to trade on it below.
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Table of Contents
What is an Abandoned Baby Pattern?
The Abandoned Baby pattern is a three-candle pattern which indicates a reversal in the trend of the market. There are a few things that make it a bit more reliable than other patterns, such as the Harami or Tweezer, such as:
- It contains three candles instead of two, increasing confidence in the reversal
- The pattern typically shows a pretty severe change in sentiment which helps set it apart from milder forms of volatility in the trend
Types of Abandoned Baby Pattern
Since it’s a reversal pattern, the Abandoned Baby pattern can be either bullish or bearish. Each type signifies a different change in the trend of a security.
Bullish Abandoned Baby Pattern
The bullish Abandoned Baby pattern is seen when the market has been trending down, but the Abandoned Baby shows a sharp reversal upward trend appearing.
Bearish Abandoned Baby Pattern
A bearish Abandoned Baby pattern occurs when the market has been trending upwards, but the Abandoned Baby shows that it is sharply reversing downward.
How To Identify the Abandoned Baby Pattern in Candlestick Trading?
The Abandoned Baby pattern is a pattern that any seasoned candlestick trader is looking for. Unlike some other patterns, Abandoned Baby patterns have several things that can vary in their construction without breaking it. More experienced traders can even learn to feel out the strength of this pattern using the variation.
Because of the potential variation, you’ll want to be extra sharp when interpreting this pattern.
Construction of the Abandoned Baby Pattern
An Abandoned Baby pattern is composed of:
- Three consecutive candlesticks
- One candlestick with a long body
- A second doji gapping above or below the first
- A third candlestick gapping the second, but in the opposite trend of the first
Recalling the namesake can help you picture how this pattern will look. For example, in a bullish Abandoned Baby pattern, you will have:
- One parent—a long red candle
- The dropped baby—the doji gapping below it
- The second parent—a long green candle reversing the trend
Key Characteristics of the Abandoned Baby Pattern
Both the bullish and bearish versions of the Abandoned Baby pattern can be identified by looking at the same criteria.
The four main criteria for an Abandoned Baby pattern are:
- There should be an established trend in the market
- The first candle should have a noticeably long body, indicating either a large price increase or decrease
- The second candle should be a doji which is gapped, or not touching, the first candle. The doji will gap up for a bearish pattern and down for a bullish one.
- The third candle should also have a long body and gap the doji in the same direction of the first, but reversing the trend
How To Interpret the Abandoned Baby Pattern?
As we mentioned earlier, good traders know how to spot and interpret the Abandoned Baby Pattern. Here’s a couple tips to keep in mind when looking at this pattern:
- The Abandoned Baby pattern is a very strong pattern, so you can be a bit braver about taking risks on it
- This pattern is also quite rare. When you see it, capitalize on it.
Variations in the Abandoned Baby Pattern
We talked above about how the pattern can vary a bit, and good traders will know how to interpret the variations. Here’s a few tips to show what we mean:
- The longer the body of the parent candles, the stronger the reversal sentiment
- If the doji does not gap either of the parent candles, then the degree to which it “touches” them indicates a drop in strength of the reversal
Those are just a couple examples. In principle, the more exaggerated the features of this pattern, the stronger indication of a reversal it is.
How To Improve the Reliability of the Abandoned Baby Pattern?
Even though the Abandoned Baby is a strong pattern, never overlook verification. Even just a couple of the simple verification methods we detail below will help increase your confidence trading on it.
Verification Candle
The easiest and simplest of the verification methods for many patterns is the verification candle, and the Abandoned Baby is no different.
This method is simple in principle: before jumping right into a trade, wait to make sure the fourth candle continues the strong upward trend (or downward, for a bearish Abandoned Baby). If it falters, or looks comparatively weak, then be alert.
RSI Indicators
This will come as no surprise to seasoned traders, but if you are new to trading then you should be looking at almost every trade you do alongside an RSI evaluation. The RSI (Relative Strength Index) will show you just how strong the trend is on a market.
With an Abandoned Baby, the RSI score can seriously increase your confidence in the trade. For example, if you see a bearish Abandoned Baby pattern and the RSI score is nearing 70, then you can be very confident that the security is likely being overbought and will become bearish soon.
How to Trade the Abandoned Baby Pattern in Candlestick Trading?
We talked about how the Abandoned Baby pattern is fairly rare but strong. This also means that when it does pop up, it can form a good basis to be confident about entering a trade, especially when combined with other verification.
Described below are a few things to consider when trading using the Abandoned Baby pattern.
Market Environment
Because of their relative strength, Abandoned Baby patterns can be traded even in relatively volatile markets. Their rarity often offsets the volatility present in the market. Combined with a quick analysis of the size of the parent candles and the gap of the doji like we talked about above, it can still present a strong trading option in less decisive markets.
Identify and Confirm Trade Opportunity
When you see an Abandoned Baby pattern occur, act fast, because many other traders likely did too. First, look at the construction of the pattern. Remember that a more exaggerated Abandoned Baby means a stronger predictive capability.
Next, gather your verification indicators, such as the verification candle and RSI values we talked about above. If everything agrees with the prediction of the pattern, then be ready to hop in.
Determine Trade Entry, Stop Loss, and Take Profit Levels
The Entry point for this pattern is fairly clear. Enter just above or below the third candle in the pattern, which allows you to maximize your buying opportunity as the trend carries on.
Stop your losses above or below the doji, depending on whether the pattern is bearish or bullish.
Take your profit using one of a few methods for this pattern, including using a moving average calculation or just a simple set profit target.
Execute and Manage Trade
When managing this trade, you’re really just looking to see how far the reversal trend is going to continue. Monitor your other market indicator values, such as your RSI, and take your profits when other patterns indicate a second reversal or stagnation coming.
Advantages and Limitations of Trading the Abandoned Baby Pattern
Even though very effective in informing trading decisions, the Abandoned Baby pattern does come with its limitations. When leveraging this pattern in making investment decisions, it is critical to account for its strengths and weaknesses.
Therefore, in the following sections, let us briefly discuss the advantages and limitations of trading the Abandoned Baby pattern.
Advantages of Trading the Abandoned Baby Pattern
Listed below are the primary advantages of trading the Abandoned Baby pattern –
- It has a long established history of being a highly reliable candlestick pattern
- It is easy to identify and spot on the price chart of a security
- It is easy to integrate into a variety of different trading strategies
Limitations of Trading the Abandoned Baby Pattern
Listed below are the primary limitations of trading the Abandoned Baby pattern –
- It is a fairly rare pattern and does not appears very frequently
- Learning to read variations in the pattern takes time and skill
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Conclusion
Using a bullish or bearish Abandoned Baby pattern when you spot one can lead to a great trading opportunity. Even though they are rare, it’s important to know how to spot them so you can capitalize on the opportunity when it arises.
Remember that to identify an Abandoned Baby pattern in candlestick trading, look for:
- One long parent candlestick in the direction of the market trend
- A doji that gaps above or below the first candle, depending on being bearish/bullish
- A third parent candle which also gaps the doji but reverses the trend of the first candle
Just like with other patterns, verification and smart trading strategies will maximize your take. Now that you know how to identify, verify, and trade strategically with the rare Abandoned Baby patterns, you can capitalize on it when you find it!
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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