Abandoned Baby Pattern Definition & Strategies

A widely used trading strategy adopted by traders globally is price action analysis. It involves searching market trends and identifying patterns that may signal favourable trading opportunities. The abandoned baby pattern is one such formation that is considered a highly reliable indicator of a potential trend reversal. In this blog post, we will explore the abandoned baby pattern in detail, discussing its definition, characteristics, and trading strategies.

What is the abandoned baby pattern?

The “abandoned baby pattern” is a three-candlestick arrangement observed following the end of an upward or downward trend. It is a rare pattern indicating a potential reversal in the opposite trend. The term “abandoned baby” refers to the market moving away from the previous trend, leaving a gap between the first and third candlesticks.

Characteristics of an abandoned baby pattern

To identify an abandoned baby pattern, there are three key characteristics to look for:

• The first candlestick should be a long and bullish/bearish abandoned baby candle, representing the current trend.
• The second candlestick is a doji or a spinning top, indicating indecision in the market.
• The third candlestick is a bearish/bullish one that opens with a gap from the previous close, signalling a potential reversal.

First candlestick

The first candlestick of the abandoned baby pattern is crucial as it establishes the current trend. It should be a long and strong bullish abandoned baby or bearish candle, representing significant buying or selling pressure in the market.

Second candlestick

The second abandoned baby candlestick in an abandoned baby pattern is a doji or a spinning top, indicating indecision among traders. This means that both buyers and sellers have a strong grip on the market, creating a potential shift in the current trend.

Third candlestick

The third candlestick is where the magic happens. It should be a bearish or bullish one that opens with a gap from the previous close, leaving behind the first two candlesticks. This sudden change in direction indicates a shift in sentiment and confirms the reversal of the previous trend.

How to spot abandoned baby patterns?

Now that we know what an abandoned baby top pattern means let’s look at how to recognise them. Here are some indicators that a baby has been abandoned:

Bullish abandoned baby

Its downtrending appearance suggests a bullish reversal. The first candle in a downtrend is either red or black. Below the close of the first candle, the subsequent candle forms a star. Furthermore, a third candle emerges from above the Doji and shuts inside the body of the first flame.

Bearish abandoned baby

Conversely, an abandoned baby that is bearish shows up in an uptrend. The first candle in a trend is green or bullish. After the initial bullish candle closes, a Doji Star forms above it, and a downward candle follows.

It is vital to notice the distances between the candles and the Doji Star. Overlap is not allowed. Otherwise, instead of looking like an abandoned infant, it looks like a morning star formation.

Strategies for trading the abandoned baby pattern

Now that we understand the definition and characteristics of an abandoned baby pattern let’s explore some strategies for trading it successfully.

1. Entering the market

When a bullish abandoned baby forms, traders take a long position because it signals a decreasing downtrend. A stop-limit order is placed slightly above the third candle. Given that the market is expected to climb further and present a potential buying opportunity, it makes sense.

2. Look for confluence

To enhance the likelihood of a successful trade, it’s essential to seek confluence with other technical indicators. These may encompass support and resistance levels, trend lines, or Fibonacci retracement levels. When several indicators align with an abandoned baby pattern, it bolsters the signal.

3. Consider timeframes

The abandoned baby pattern can be observed in any timeframe, but its reliability increases in longer timeframes. This is because longer timeframes usually represent stronger trends, making the pattern more significant.

4. Combine with other price action strategies.

The primary focus of price action trading is pattern recognition and analysis of market movements. The abandoned baby pattern can be utilised to gain a more comprehensive understanding of the market and enhance the probability of a profitable trade by integrating it with other price action tactics such as pin bars or engulfing patterns.

5. Consider timeframes

Although the abandoned baby pattern can be seen over any length of time, longer periods show higher reliability. This is so because the pattern becomes more important over longer intervals, which often indicates greater trends.

6. Use proper risk management.

A pivotal aspect of trading is risk management, which becomes even more crucial when dealing with an unusual pattern like an abandoned baby. To mitigate potential losses in the event that the market fails to execute the anticipated reversal, stop-loss orders should invariably be placed.

Identification of the abandoned baby pattern

Although the abandoned baby pattern is not common, when it does show up on a chart, it can be quite useful. You must search for the following characteristics in order to spot the pattern:

• Two gaps are required in the pattern: one between the second and third candles and another between the first and second. Not merely a few points, but noticeable and substantial gaps should be present. The gaps indicate a change in market sentiment and a discontinuity in the price activity.

• Large and the same colour—either red or green—should characterise the first and third candles. The second candle should have long shadows and either very little or no body, which is known as a doji. As long as the doji’s colour is different from the first and third candles, it doesn’t matter. The candles’ size and colour demonstrate a sharp contrast as well as a reversal in the price movement.

• The pattern should emerge after the conclusion of an obvious and well-defined upward or downward trend. Instead of being erratic or skewed, the trend should be clear and steady. The pattern is a legitimate and trustworthy reversal indication, not a fictitious or transient one, as the trending background demonstrates.

The Bottom Line

The abandoned baby pattern is a powerful price action signal that can potentially lead to profitable trades. It is important to understand its definition and characteristics and use proper risk management when trading it. By combining this pattern with other technical indicators and price action strategies, traders can increase their chances of success in the market. Remember always to wait for confirmation before entering a trade and stay disciplined in your approach.

FAQs