The use of candlestick patterns in trading has become a popular technique for almost all traders. The separating line pattern is one of the easier patterns to identify, and many consider it a promising and reliable trade continuation signal. Let’s talk more about what these patterns mean, how you can locate them, and how to use them for trades.
Found in both the bullish and bearish markets, separating line patterns are typically a sign that the current trend a stock is experiencing is likely to continue. Separating lines patterns consist of two candlesticks heading in opposite directions, identified by the colors of those two candlesticks.
Separating line patterns are ideal for those who are looking to find continuations in the trend of a particular security. Although these patterns do not guarantee how a trend is going to end up, they are a reliable source that is popular among many traders.
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Table of Contents
Types of Separating Line Patterns in Candlestick Patterns
In order to fully understand and utilize the separating line pattern, you need to be aware of both the bearish and bullish versions of this pattern.
Separating line trends can be seen if the market is having a momentary pullback, and they are a great sign of what the market intends to do going forward.
Bullish Separating Line Pattern
The bullish separating line pattern appears when the security is already in an upward trend, and oftentimes the uptrend in which it appears tends to be a strong trend.
In this pattern, both candlesticks should be long and opposite colors. The first candlestick of this pattern should be black or red color, whereas the second candle must be the opposite color (i.e. white or green).
Ideally, your second candle open should be equal to the opening price of the first candle. Additionally, both of these lines will also be moving in different directions.
Bearish Separating Line Pattern
This is the bearish version of the same pattern that consists of two candlesticks moving in opposite directions with the same opening price.
The first candlestick in the bearish pattern should be either white or green rising upward, and the second should be either black or white and be downward.
In some separating line patterns, the second candle may not have a wick.
How to Identify Separating Line Patterns in Candlestick Trading?
Although candlestick trading, as a trading discipline, can seem intimidating, not only is the separating line pattern easy to identify, but it is also quite self-explanatory. Here are ways that you can catch a separating line pattern and the attributes that you need to know.
Construction of Separating Line Pattern
Separating lines are relatively easy to identify and understand.
You are looking for a set of two candlesticks that are heading in different directions. The candlesticks will have different colors representing other markets and different trends.
Another identifying factor is that the second candlestick will open at the same price as the first.
Characteristics of Separating Line Pattern
Described below are the key characteristics of a separating line pattern that will empower you to accurately identify and trade this pattern –
- Direction of Trend: Depending on the direction of the trend, it can help you know if you are likely to continue in a bearish or a bullish market.
A bearish market will continue when the pattern appears during a downward trend while a bullish market will continue on this pattern’s appearance during an upward trend.
- Color of First Candlestick: Bearish markets will always have a candlestick that is white and long.
A bullish market will have a black candlestick that is also long.
- Color of Second Candlestick: No matter where the open is for your first candle, you need the second candlestick to open at the same point.
The color of the candlestick will depend on bullish or bearish, which is the opposite of the first candlestick.
How to Interpret Separate Line Patterns?
Separating line patterns are quite definitive in trading.
In both the bullish and bearish markets, this pattern is seen as an indication for a strong continuation in the price trend of the security. If you are following a bullish market pattern, then you need to know that the security may drop if the market becomes bearish, but that drop does not mean you should immediately make a move.
To feel more confident about your next move, you should wait to see where the next candlestick falls, as it might complete the separating line pattern that can potentially give you the confidence of a continuation in the price trend. It is also essential that you realize separating line patterns is not guaranteed to result in the outcome you want. You should always utilize additional patterns and charts to help inform your trading decisions.
How to Improve the Reliability of Separate Line Patterns in Candlestick Trading?
Separating line patterns on their own is one of the more reliable patterns when it comes to trading stocks.
You can certainly improve the reliability of its trading signals by using them in combination with signals from channel indicators such as – keltner channels, bollinger bands and donchian channels. These channels are moving bands that can show trends and where prices are possibly headed.
With candlestick patterns being dependent on possible shifts in the market, these channels are a great tool to increase your confidence when it comes to deciding if you should buy or sell a specific security.
How to Trade Separate Line Patterns in Candlestick Trading?
When it comes to trading with the separate line patterns in candlestick trading, one of the most popular strategies to use is to focus on the volume of the market as well as the volume of the security. Described below are a few things that can help inform your trading decisions under this strategy –
Market Environment
This is a great strategy to use to help you identify significant shifts in terms of who is entering and exiting the market. The appearance of this pattern gives you an indication that the overall market environment is favorable for a price trend continuation.
Identify and Confirm Trade Opportunity
You are ideally looking for a second candlestick that is twice the size of the first candlestick in the pattern.
Determine Trade Entry, Stop Loss, and Take Profit Levels
Described below is how you can decide to enter, identity stop loss, and determine take profit levels when trading the separating line pattern –
- Entry: Once the second candlestick has at least doubled in volume of the original candlestick, that is the sign for you to enter a trade.
- Stop Loss: You should determine if you want to exit the security after at least five candlesticks show the trend for that specific security is opposite to what initially informed your trade. Additionally, in the case of a bullish separating line pattern, a stop loss below the bottom of the first candle is also a suitable spot. A similar approach can be leveraged when trading the bearish separating line pattern as well.
- Take Profit: With the separating line pattern, you should never let your profit fall below the price you entered on. Similar to your stop loss, you can easily set your take profit up to five candlesticks in the direction of your trade. Separately, tools such as Fibonacci Extension levels provide traders with a reliable way to identify this pattern.
Execute and Manage Trade
With candlestick trading, you need to have a general idea of how the market plays out as a whole.
Using additional analysis before entering or exiting on a stock will ensure that the pattern is significant enough for you to make a move.
When using volume to help your trade strategy, the volume of previous patterns can be a great indication.
Advantages and Limitations of Trading Separating Line Patterns
Now that we have discussed the fundamentals around the separating line patterns, let us discuss a few advantages and limitations of trading this pattern before we conclude this article.
Advantages of Trading Separating Line Pattern
Listed below are few important advantages of separating line pattern that you should account for when deciding on integrating this pattern into your trading strategy –
- The separating line pattern is relatively easy and straightforward to identify
- Contrary to most candlestick patterns, separating line pattern is oftentimes reliable as a standalone indicator
- These patterns form a great confirmation signal for trend continuation and works well with other technical indicators
Limitations of Trading Separating Line Pattern
Listed below are few important limitations of separating line pattern that you should account for when deciding on integrating this pattern into your trading strategy –
- Similar to any other tool in technical analysis, separating line pattern does not guarantee a trend continuation
- It can be risky to trade this pattern in isolation, despite its stronger reliability in comparison to other candlestick patterns
- Gaps in security prices can cause candlestick patterns to change quickly
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Conclusion
The separating line pattern is one of the more reliable candlestick patterns in trading. Not only is it easy to identify and understand, but it is a strong indication that a trend is going to continue on the pattern that it has been on.
Separating line patterns can be a strong indicator and are often sought after.
Two candlesticks in opposing directions can define a separating line pattern. The candlesticks will be different colors, and the second candlestick will always start at the open for the first candlestick.
Depending on the market, the second candlestick may or may not have a wick. This pattern means that there is going to be a continuation of the current trend, even if the market experiences a quick dip.
On their own, separate line patterns are one of the most reliable patterns, but this can be improved with the use of channel indicators such as – bollinger bands, keltner channels, and donchian channels.
Focusing on the volume of the market and stock itself can also help you become a better trader with this candlestick tool.
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