Understanding The Abandoned Baby Pattern
Japanese candlesticks patterns are unique, and some patterns are rarer than others. One such formation is the abandoned baby pattern. In the earlier articles, we have discussed several other candlestick patterns that are recognized by traders to indicate a trend reversal. Similarly, an abandoned baby is also a trend reversal formation that appears like a morning star but a more reliable one. In this article, we will discuss an abandoned baby in detail – its features, how to spot and interpret it.
The abandoned baby
An abandoned baby is a rare formation in a candlestick chart. It can appear in a downtrend or uptrend signalling trend reversal. In appearance, it is like a Doji Star or cross, with no real-body and upper and lower shadows. An abandoned baby has candles formed at either side of it with prominent real-bodies, in uptrend and downtrend, called parents. It is considered a strong trend reversal signal and therefore, you shouldn’t ignore it. But to react to it, you should be able to spot it correctly.
An abandoned baby pattern is a formation comprising three candlesticks. And, it can form in both bullish and bearish trends. To spot an abandoned baby look for the following,
Bullish abandoned baby: It appears in the downtrend, indicating a bullish reversal. The first candle that appears in the downtrend is black or red. The next is a star that forms below the closing of the first candle. The third is an upward candle that opens above the Doji and closes within the body of the first candle.
Bearish abandoned baby: Conversely, a bearish abandoned baby appears in an uptrend. The first candle is a green or bullish candle that appears in the trend. The next is the Doji Star that forms outside the trend above the closing of the first bullish candle, followed by a downward candle forming below the Doji.
The gaps between the candles and the Doji Star are significant to notice. They mustn’t overlap. Otherwise, it is a morning star formation and not an abandoned baby.
Interpreting Abandon Baby
An abandoned baby is a trend reversal pattern. Its appearance in downtrend indicates an end of the selling spree and return of the bull in the market. Conversely, when it appears in an uptrend, it means that buyers are leaving the market and selling forces are taking over. Although it is a rare pattern, traders put their faith on it to adjust their position. It is considered a reliable formation compared to the other Doji formations and a more definite indication of a trend reversal. That’s because each candle is distinctly formed and don’t overlap. In morning or evening star formations the confirmation candle overlaps the first one.
The advantage of an abandoned baby is that it is a confirmed trend reversal pattern. So, when you spot one in the trendline, you can trade right away. Abandon baby doesn’t need confirmation from other trading tools. Although, you can still match it with other tools to be sure.
So, how to interpret a bullish abandoned baby? The psychology behind the formation suggests that the market has a significant drop or sell-off in the trend – the first candle. A Doji forms afterwards, confirming that a levelling-off is happening with opening and closing prices being same. In this case, the Doji implies that sellers are gradually losing the grip and buyers are trying to take over the market. The third, confirming candle forms in the uptrend and gaps higher from the Doji.
Similarly, when you spot an abandoned baby in the uptrend, you can interpret it the same way, only reversely.
Trading Around Bullish Abandon Baby
There are multiple ways to trade in an abandoned baby.
Entering the market: A Bullish abandoned baby indicates weakening downtrend, and so, traders enter into a long position after the third candle forms. They place a stop-limit order just above the third candle. It makes sense since the market will continue to rise, and then it could be used as a buying opportunity.
Stop-loss: To avoid incurring losses due to any unexpected change, traders place a stop-loss limit just below the down shadow of the Doji Star. Some traders would try to limit their risk exposure by placing the stop-loss below the endpoint of the downward wick of the third candle.
Profit target: Since the trading strategy doesn’t indicate a profit target, traders need to use other trading tools to confirm the limit, like Fibonacci Retracement, moving oscillator, or the moving average.
An abandoned baby is considered a robust formation as it allows traders to place a tight stop-loss limit and identify resistance level. Any deviation from the stop-loss limit will indicate that the trend is false. And hence, traders trust the formation more than other candlestick formations. When traders identify an abandoned baby pattern in an uptrend, they enter a long position in the market. Similarly, they would enter a short when the form appears in an uptrend. You can trade more than your usual trading capacity when an abandoned pattern is formed because it has a higher rate of success than other patterns.