Forex

How To Trade the Abandoned Baby Pattern

In this review, we will get acquainted with the candlestick analysis strong reversal pattern "Abandoned Baby". Let's look at the features of its formation, and the trading techniques for this pattern.

How the "Abandoned Baby" pattern is formed

The Abandoned Baby candlestick pattern is a rare, strong reversal pattern that forms on the local highs and lows of the price chart. It consists of three candlesticks. The first one has a normal body, and the second one is a doji candle (it has practically no body, the open and close prices being almost the same). The third one closes in the opposite direction to the first candlestick. The second candlestick should have gaps (price gaps) on both sides.

As noted by the guru of candlestick analysis Steve Nison, the appearance of a doji after a strong white candlestick indicates the current overbought state of the financial instrument. And vice versa: the appearance of a doji after a black candlestick indicates an oversold condition of the asset. In the "Abandoned Baby" pattern, a doji opens with a

A gap is an area of price gaps and discontinuity on a financial instrument's chart. It occurs when the opening price of a trading period has risen or fallen significantly compared to the closing price of the previous trading session. As a rule, gaps occur under the influence of important news.

"Abandoned Baby" is very similar to "Morning Star" and "Evening Star" in its formation principle, but differs in the appearance of a doji candlestick with a gap on both sides. "Morning Star" and "Evening Star" do not require the average candlestick to be a doji or have gaps on both sides, so they are much more common on price charts.

"Bullish" pattern "Abandoned baby"

This is formed during a downtrend, at the lows of the price chart. The first black candlestick appears first. Against the backdrop of negative market sentiment, the next trading session opens with a gap down, but the "bears" do not succeed, and a doji appears on the chart. Seeing the weakness of the sellers, the bulls seize the initiative: the third candlestick opens with a gap up and closes with a confident white body.

A bullish "Abandoned Baby" reversal pattern forms on the chart as a result. Buyers have managed to seize the initiative, and are ready to keep pushing the price up. If the "bears" fail to close the gaps and drop the quotations below the doji low, the "bulls" are likely to go on the offensive and initiate an upward correction or even a trend reversal.

"Bear" "Abandoned baby" pattern

This is formed during an uptrend, at the highs of the market. The first white bullish candlestick appears on the chart. Against the background of the positive mood of the market participants, the next trading session opens with a gap up, but with the buyers failing to succeed, a doji is formed on the chart. Noticing the weakness of the "bulls", the downside players seize the initiative: the third candlestick opens with a gap down and closes with a confident black body.

As a result, a bearish "Abandoned Baby" reversal pattern appears on the chart. The sellers managed to seize the initiative, and are ready to drive the price down. If the "bulls" fail to close the gaps and exceed the doji maximum, there is a high probability of a downward correction or even a change of the uptrend to a downward one.

How to buy on the bullish "Abandoned Baby" pattern

• During a downtrend, a bullish "Abandoned Baby" pattern appears on the local lows of the price chart
• It is advisable to open a buy position when the price rises above the maximum of the third white candlestick in the pattern. Stop Loss is set at the doji low
• To set Take Profit, you can be guided by Fibonacci retracement levels from the previous downtrend, significant support, and resistance levels

How to sell on the bearish "Abandoned Baby" pattern

• During the upward trend, a bearish "Abandoned Baby" pattern is formed at the local highs on the price chart.
• A sell position can be opened after the price decreases below the third black candlestick in the pattern. Stop Loss is set at the doji's maximum.
• To set Take Profit, you can be guided by Fibonacci retracement levels from the previous upward movement and significant support and resistance levels.

Recommendations for the use of the pattern in trading

• The pattern must be preceded by a pronounced upward or downward price movement – it is not to be traded in a sideways trend.
• It is best to use higher timeframes: from H4 and above.
• Risk management should be followed, and protective stop-loss orders should be placed.

Conclusion

The "Abandoned Baby" reversal pattern is formed at the local extrema of the price chart during an uptrend or downtrend. This is a fairly rare candlestick pattern that gives a strong reversal signal. Before you start real trading, you should test the pattern on historical data and practice on a demo account.

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