Candlestick charts help traders track the price action of an asset over time and determine when to enter or exit a trade. They give signals to traders daily through the visualizations of the open, close, high, and low prices, as well as over several trading periods by forming specific patterns that can predict price action. One of many candlestick patterns is the Tasuki Gap pattern.
The Tasuki Gap pattern can occur as an upside or downside pattern and indicates a continuation of the current trend for the traders who spot it. It is beneficial when trading stocks or other securities in a trending bear or bull market.
In the remainder of this article, we will explain the composition, implications, and uses of Tasuki Gap patterns in more detail.
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Table of Contents
Types of Tasuki Gap Candlestick Patterns
As previously mentioned, there is the upside and the downside Tasuki Gap pattern. They are not typically seen together, as they usually occur in a clear trend. Although they are the inverse of each other, the patterns both indicate a short consolidation period before the continuation of the trend.
How to Identify the Tasuki Gap Pattern in Candlestick Trading?
The Tasuki Gap pattern can be identified by its construction and characteristics in candlestick trading:
Construction of a Tasuki Gap Pattern
Both the upside and the downside Tasuki Gap patterns are made of three candles. Occasionally, a fourth candle will follow, which closes the gap between the first two instead of reverting to follow the trend.
Upside: Occurs within an Uptrend
- 1st Candlestick: White, ideally tall
- 2nd Candlestick: White, opening above the high point of the 1st candlestick
- 3rd Candlestick: Black, closing in the gap between the 1st and 2nd candlesticks
Downside: Occurs within a Downtrend
- 1st Candlestick: Black, ideally tall
- 2nd Candlestick: Black, opening below the low point of the 1st candlestick
- 3rd Candlestick: White, closing in the gap between the 1st and 2nd candlesticks
Key Characteristics of a Tasuki Gap Pattern in a Candlestick Chart
As with all other candlesticks, the candles of the Tasuki Gap are formed by an opening price and a closing price forming the real body, and a shadow (above or below the candle’s body) indicating the highest and lowest selling price of the period.
A trader can spot a Tasuki Gap pattern by identifying these characteristics:
- Trend: The upside Tasuki Gap only occurs during a bullish trend, the downside only during a bearish trend.
- Opening Level: The upside pattern always begins with two white candles, with the second opening higher than the first peaked, thus creating a gap. The downside pattern begins with two black candles, the second opening below the first’s lowest selling price.
- Shadows: The shadows indicate the trading period’s highs and lows; the gap must exist between the shadows, with no overlap, for a Tasuki Gap to occur. Tip: Some say to ignore the shadows, and only look at the real bodies of the candles.
- Third Candle: The third candle goes against the trend. It opens within the range of the 2nd candle’s real body and closes within the gap between the 1st and 2nd candles’ shadows. Tip: The 3rd candle does not close the gap; it closes within the gap. Also, it is ideally the same size as the 2nd candle.
As one can see, the downside Tasuki Gap pattern is simply the inverse of an upside pattern.
How to Interpret Tasuki Gap Pattern?
A Tasuki Gap shows that either the bears or the bulls control the market. After two strong trending days, the opposing mentality will try to regain the market by buying or selling the asset. This opposing mentality will quickly lose momentum as the bears or the bulls continue selling or buying, respectively. The inability to close the gap suggests the trending mentality will continue in the next period.
Tip: If there is a second candle that opposes the trend—and if this candle “closes the gap” by closing within the range of the first candle’s body—this can be interpreted as a trend reversal! But the trend reversal will, likely, not last longer than 3 to 7 trading periods.
How to Improve the Reliability of Tasuki Gap Pattern in Candlestick Trading?
According to Thomas Bulkowski, in his book Encyclopedia of Candlestick Charts, the Tasuki Gap is not a commonly occurring pattern. He found that the upside Tasuki Gap predicted a trend continuation accurately 57% of the time immediately after the pattern, while the downside Tasuki reliably predicted a continuation of the bear market 51% of the time.
Furthermore, he found that the trend typically ends between 8 and 13 trading periods after the Tasuki appears.
Bulkowski suggests that traders hold off on acting based on a Tasuki Gap if it occurs just after a peak or trough, as a Tasuki Gap is more reliable in an established trend, rather than at the beginning of a trend change.
Trend indicators, such as Moving Average lines, help to signal a trend and can be helpful if spotted before the Tasuki Gap pattern occurs to improve reliability.
Oscillators are other technical analysis indicators that can significantly improve the reliability of this pattern by informing the trader of the volatility of the asset in question, as well as indicating breakouts (which would conflict with what the Tasuki Gap Pattern is indicating in this case).
Additionally, Tasuki Gaps made of tall candles are more reliable than those of short candles.
How to Use the Tasuki Gap Pattern in Candlestick Trading?
A trader who spots a Tasuki pattern can use it to his advantage in a bull market, to go long, or a bear market, to short sell. A long strategy with the upward Tasuki Gap pattern is often used:
Market Environment
The market environment needed for this strategy is a clear bullish market—is to say, trending upwards: two tall white candles, the second completely above the first, confirm the bullish market sentiment.
Identify and Confirm Trade Opportunity
An opportunity exists when an upward Tasuki Gap occurs with the third candle closing in the middle of the gap between the first two.
Determine Trade Entry, Stop Loss and Take Profit Levels
- Because this is a signal for a trend continuation, the trader anticipates the price of the asset to rise. This is then a time to buy and go long. He enters the market, buying after the trading session, which closed in the middle of the gap.
- He places a stop loss below the open of the first candle, to prevent losses should the trend reverse.
- He knows to exit the trade by selling the asset within about ten days of buying—or—before the next trend reversal. A reversal can be indicated by an oscillator or by support and resistance indicators such as Bollinger Bands.
Execute and Manage Trade
For highly volatile assets, the price may drop below the initial candlestick’s open, before rising and continuing the trend. A conservative stop-gap will cause the trader to exit too early in this case, but it can save him if the price action continues to fall.
Advantages and Limitations of the Tasuki Gap Pattern
Now that we have covered the basics around the Tasuki gap pattern, let us take a quick look at a few advantages and disadvantages of trading this pattern.
Advantages of the Tasuki Gap Pattern
Listed below are the key advantages of trading the Tasuki gap pattern –
- It works on all asset types and trading periods
- It is usable in both bullish and bearish markets
Limitations of the Tasuki Gap Pattern
Listed below are the key advantages of trading the Tasuki gap pattern –
- It is a rare pattern and does not appear very frequently
- It is not as reliable as are some other trend indicators
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Conclusion
Candlestick patterns are an excellent tool for assessing market psychology and price action. The Tasuki Gap pattern is a good pattern to learn when starting because it can be spotted in both a bull and a bear market, and it works well in conjunction with other trend indicators. Furthermore, they offer traders specific points to enter and place stop losses, which can be a daunting decision left without a reliable indicator.
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