Last Updated on 21 September, 2020 by Samuelsson
The bearish abandoned baby could be said to belong to some of the most popular candlestick patterns out there, and is relied upon by many traders for their market analysis.
The bearish abandoned baby is a three candle bearish reversal pattern that appears towards the end of an uptrend. The first candle is bullish and followed by a doji that gaps to the upside. The doji, in turn, is followed by a negative price gap after which a bearish candle appears.
If you are looking to learn more about the bearish abandoned baby pattern, you have come to the right place. In this guide you’re going to learn how to identify a bearish abandoned baby, its meaning, and how to improve the pattern for real trading. In addition to this, we’ll also take a closer look at some trading strategies that use the pattern!
How to Identify a Bearish Abandoned Baby
For a bearish abandoned baby to form, the following criteria must be met:
- The first candle is positive and part of the current uptrend
- The next candle gaps up and forms a doji
- The third candle gaps down and becomes a bearish candle
- The real bodies of the candles should not overlap between bar 1 to 2, and bar 2 to 3.
The bearish abandoned baby is reminiscent of an evening star, which is another popular candlestick pattern. However, the difference lies in the fourth point on the list above. That is, the candles of an evening star might overlap, while those of a bearish abandoned baby won’t. In that regard, the latter in theory is a stronger signal, which traditionally is believed to be more accurate.
What Does a Bearish Abandoned Baby Tell Us About the Market?
Candlestick patterns are representations of market data, which means that they show us how the battle between buying and selling pressure played out in a market. For a trader, this is highly relevant information, since it could be used to analyze which direction the market is likely to head next!
Now, it’s nearly impossible to know why a market moved in a certain way, but trying to analyze market movements is a great way to achieve a deeper understanding of the market and its mechanism. You will soon start to notice recurrent patterns, which might even become the start to a new trading strategy!
Having said all this, here is what might have happened when the market forms a bearish abandoned baby
Coming from a bullish trend, market participants are mostly bullish and believe in ascending prices. Once the first candle of the pattern forms, this seems correct. We get a fairly long, bullish candle, and the bullish sentiment even spills over to the next trading day. This results in a positive gap the coming day.
However, now the market has entered far into overbought territory, and the risk of a reversion to the mean has increased significantly. This leads to abating buying pressure, and the market forms a Doji which signals that it’s hesitant about where to head next.
Spotting the doji, more market participants become worried that the current uptrend has come to an end, and place orders to sell their positions. With more selling pressure coming in, the market gaps down. The gap, in turn, begets more buying pressure, and before you know it, the market closes in the lower part of a negative candle.
The Bearish Abandoned baby pattern is the story about how fervent bullish sentiment becomes bearish, over the course of a doji and two significant gaps.
Bearish Abandoned Baby Example
Here follows an example of the bearish abandoned baby:
How to Trade the Bearish Abandoned Baby
Many traders who yet haven’t made money in the markets, believe that candlestick patterns can be trusted as they are. However, the harsh truth is that it doesn’t work that way.
Candlestick patterns like the bearish abandoned baby, in most cases, will need additional filters for the results to be acceptable. In addition to this, they also need to be traded on markets where they work. There is nothing such as a universal pattern that works across all markets. The best way to figure out where to trade a pattern, is by using backtesting.
Now, in this part of the article, we wanted to show you a couple of filters and conditions we like to use to improve strategies. As a matter of fact, they’re part of trading strategies that we trade at the moment!
Seasonality and Time-Based Tendencies
What many traders don’t know, is that a market can behave quite differently depending on things like the day of the week, month, or time of day. And if you’re aware of these tendencies, you can choose to only take a trade during those times when it’s the most favorable for the pattern you trade.
In the case of the Bearish abandoned baby, we might want to consider only acting on the signal if the following period is known to be extra bearish, or at least neutral.
For example, let’s say that we spot a bearish abandoned baby, and it’s the last date of the month. Now, if we’re in the stock market. the chances are that the turn of the month effect is in play, leading to a bullish bias for the coming days. Then we might not be interested in taking that trade because of this.
However, as always, experiment and see what works best with your particular market. It will certainly vary a lot!
Here are some places you could start looking for tendencies like these!
- Days of the week
- Parts of the month
- Time of day
The volatility levels in a market could have a huge effect on the accuracy of a pattern like the bearish abandoned baby. Usually, high volume means that a market move was more significant.
Now, with the bearish abandoned baby, the most intuitive way is to go about in either of the following two ways:
- Demand that the volume of the doji is significantly higher than the volume of the surrounding bars.
- Demand that the volume of the last bearish bar is higher than that of the first bullish bar. This shows that the market was more keen on going down than up!
Of course, there are many more variations you could use. Still, the two above are a great start! Be sure to see what works best with your market and timeframe!
Bearish Abandoned Baby Trading Strategies
Now that we have had a look at a couple of ways that you can improve the accuracy of a pattern like the bearish abandoned baby, we wanted to show you a couple of trading strategy examples.
Please keep in mind that the following strategies need to be applied to the right timeframe and market to work. As always, you need to adapt your trading style to what you’re trading. Again, we recommend backtesting for this!
So let’s start with the trading strategy examples!
Trading strategy 1: Bearish Abandoned Baby and Gap Condition
If you remember, the gaps were an integral part of the bearish abandoned baby, and are what set it apart from other similar patterns. As such, it’s reasonable to believe the size of the gaps could be used to determine the accuracy of the pattern.
Thus, in this trading strategy, we’ll demand that both the gaps must be quite big. More precisely, they must be bigger than the average true range (ATR) times 0.5.
So, to go long, we demand that:
- We have a bearish abandoned baby.
- Both gaps are at least half the size of the average true range.
Then we exit the market 5 bars later.
Trading Strategy 2: Bearish Abandoned Baby With RSI Filter
In this strategy we’ll demand that the market is overbought before we take a signal, to increase our chances of success.
And to do this, we employ the RSI indicator, which in fact is one of our favorite trading indicators that has proven itself to be versatile and powerful across many markets and timeframes.
To enter a trade, the 5-period RSI must be higher than 70. That ensures that the market has moved up enough to start getting into overbought territory
As such, the rules to short the market become:
- There is a bearish Abandoned baby
- The 5-period RSI is higher than 70.
Then we exit the trade as soon as RSI crosses below 30.
In this guide to the bearish abandoned baby pattern we’ve looked at the definition and meaning of the pattern, and how you can go about to improve its performance.
Just remember that it’s crucial to TEST EVERYTHING ON HISTORICAL DATA BEFORE TRADING IT LIVE. Most traders don’t do this, and continue to trade losing systems and strategies.
If you want to learn more about how to become a profitable trader, we recommend that you have a look at our following guides:
The complete guide to Algorithmic trading
The complete guide to swing trading