Do you know what an abandoned baby candle stick pattern is? If not, don’t worry, you’re about to learn what experienced traders know about pattern forms and price trends!
An abandoned baby is a type of candlestick pattern that can be used to predict future price movements – much like the morning star and similar patterns.
In this post, we will discuss how to spot and trade the abandoned baby candlestick pattern. More specifically, we will cover what this strong advancing candle pattern is, how to identify it, and what it means for day trading techniques.
Abandoned Baby Candlestick Pattern
Three-Bar Reversal Candlestick Pattern
The abandoned baby candlestick pattern is a three-bar reversal pattern that is similar to the morning and evening star formations. It is considered a very reliable reversal signal when it occurs after a sharp rise or drop. The major difference between the abandoned baby and the morning/evening star is that the real bodies and shadows cannot overlap from bar to bar. This makes the abandoned baby a very rare and unique pattern.
The three-bar pattern can be found at the end of a sharp rise or drop and is considered a reversal signal. The first bar is typically a long red (or black) candlestick, followed by a small green (or white) candlestick that gaps below the first candle’s close. The third candle is another long red (or black) candlestick that gaps below the second candle’s open.
The small green (or white) candle in the middle is considered the “abandoned baby.” This is because it gaps away from the previous candlestick, as if it were abandoned, and then rallies back to close near or above the center of the first candle.
How to Trade the Abandoned Baby
The Abandoned baby is a high-probability trade setup with a very favorable risk-to-reward ratio. If you can learn to spot this pattern, it can be a very profitable addition to your trading arsenal.
The key things to look for include:
- Sharp decline in price
- Long red (black) candle
- Doji candlestick
- Long green (white) candle
If you see all of these things line up, then you have a potential abandoned baby candlestick pattern on your hands. Get ready to enter a buy order!
To trade this pattern, you would buy at the opening of the third candle. Your stop loss would be placed just below the low of the Doji candlestick. And your target profit would be the same as your stop loss.
Doji Candlestick
The Doji candlestick is one of the most popular and important candlesticks in Japanese Candlestick trading. It signifies indecision or a tug of war between buyers and sellers. A Doji candle forms when the open and close prices are equal or nearly equal, resulting in a small body with long upper and lower wicks. The longer the wicks, the more indecision or uncertainty is present.
Profit Target
You can always use a moving average or an oscillator to exit an abandoned baby trade. The other option is to rely on basic price action rules to close your profitable position.
Price action rules for the abandoned baby candlestick pattern is to place your stop loss above or below the mother bar, depending on market conditions and trends. For a long entry, you would place your stop loss below the low of the mother bar. And for a short entry, you would place your stop loss above the high of the mother bar. The profit target is usually twice the risk or more.
Stop-Loss
As already mentioned, when you trade the abandoned baby candlestick pattern, you should always practice risk management by protecting your trade with a stop-loss order.
The stop loss is the order placed with your broker to buy or sell a security when it reaches a certain price. This is important for options trading because it can help you limit your losses if the stock price moves against you. There are two types of stop-loss orders:
- A market order stop loss is an order to buy or sell a security at the current market price.
- A limit order stop loss is an order to buy or sell a security at a specific price.
When you are placing a stop-loss order, you will need to decide which type of order you want to use. Each has its own advantages and disadvantages.
Market Orders
Market orders are the most commonly used type of stop-loss order. They are easy to place and can be filled quickly. The disadvantage of market orders is that you may not get the exact price you wanted.
Limit Orders
Limit orders are not as common, but they can be useful in certain situations. Limit orders allow you to specify the exact price at which you want to buy or sell a security. This can be helpful if you think the stock price is going to move quickly, and you want to make sure you get your order filled at the price you want. The disadvantage of limit orders is that they may not be filled at all if the stock price does not reach your specified price.
When you are placing a stop-loss order, you will need to decide which type of order is best for your situation.
For limit orders, the proper location of your stop should be or below the middle candle of the formation, depending on the direction of your trade. Each has its own advantages and disadvantages. Make sure you understand the risks before you place your order.
The Psychology
The psychology of abandoned baby candlestick patterns is pretty simple to understand. It happens when the bulls take control of the market at an early stage, but the bears’ step in and push prices lower. This action creates a long upper shadow and a small body that is located below the candlesticks with long shadows.
The Abandoned baby candlestick can be found at the bottom of a downtrend or during a consolidation period. It is considered a bullish reversal pattern and it can be used to enter a long position. The stop loss should be placed below the low of the candlestick.
Summary
So how do you spot and trade an abandoned baby candlestick pattern? And what do the abandoned baby candlestick pattern signals tell us?
- A bullish abandoned baby pattern signals an end of the selling pressure of the bears and the return of the bulls in the market.
- A bearish abandoned baby pattern signals that bulls are leaving and indicate the return of the bears in the market.
- The psychology behind the formation of a bullish abandoned baby pattern suggests that the market has witnessed a significant sell-off in the first candle – leading to the formation of a bearish candlestick.
- A Doji candlestick pattern is formed afterward, which confirms that now a market is uncertain whether the opening and closing prices are the same – the bears are losing their grip and the bulls are taking over the market.
- The third bullish abandoned baby candle confirms that the trend has been reversed to an uptrend and also gaps higher from the Doji. The market has witnessed a significant buy-off in the first candle and a bullish candlestick is formed.
- A Doji forms afterward, which confirms that now a market is uncertain whether the opening and closing prices are the same. Here, the bulls are losing their grip and the bears are taking over the market.
- The third bearish abandoned baby candle confirms that the trend has been reversed to the downtrend and also gaps lower from the Doji.
The abandoned baby candlestick pattern is a very reliable reversal pattern that every trader should be aware of. It can be used to enter short positions with tight stops and clear targets. Be on the lookout for this pattern in the markets and start trading it today!
Now that you know what an abandoned baby candle stick pattern is, keep an eye out for it in the future. It could help you predict when the market is about to move higher!
To Learn More
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
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