Last Updated on 21 September, 2020 by Therobusttrader
The candlestick chart has become one of the most popular chart analysis methods out there. With their colorful bodies and characteristic wicks, they form patterns that have different meanings. One such pattern is the Downside Tasuki gap pattern.
Downside Tasuki Gap is a bearish continuation pattern that forms in the middle of a downtrend. The first candle is bearish, and is followed by a negative gap and another bearish candle. The third candle is bullish and closes right in the gap between the first two bars.
In this article, we’re going to have a closer look at the downside tasuki gap. We will cover it’s meaning, ways of improving the pattern, and also take a closer look at some example trading strategies.
How to Identify A Downside Tasuki Gap
Since a downside Tasuki gap has to meet quite a lot of conditions, it’s not a pattern you will stumble upon very often. Here is how you identify the pattern:
- The first and second candles are bearish, and quite tall.
- The second candle performs a negative gap, leaving a distance between the first and second candle.
- The third candle is bullish, and closes right in between the close of the first candle and open of the second. That is, in the gap zone.
The common interpretation is that a downside tasuki gap signals a pullback, but not much more than that. Being a continuation pattern, it signals that the market will continue heading down soon!
What Does a Downside Tasuki Gap Tell About the Market?
Every candlestick pattern tells us something about the state of the market, and how buyers and sellers interacted. And while it’s hard to know exactly what happened, it’s a really good exercise to try and imagine what the market has been up to. Thinking creatively about the market and trading in general has a tendency to spark new ideas, and improve on your understanding of the market as a whole.
So, let’s depict a probable scenario of what might have happened once the downside Tasuki gap pattern forms!
The market is in a downtrend, and market sentiment is bearish. The first candle of the pattern forms as a result of heavy selling pressure, which spills over to the next session, where the market gaps down, before producing another bearish candle.
Now, since the market has gone done so abruptly, some market participants begin to sense a buying opportunity. As such, they fuel a small pullback, that results in the last bullish candle.
However, upon reaching the gap zone, which acts as resistance, sellers put a cap on the market, and prevents it from going up further.
The fact that the buyers didn’t manage to push the market beyond the gap zone, is an indication that the bearish market trend isn’t going away just yet.
Downside Tasuki Gap Example
Here follows an example of the pattern:
How to Improve the Downside Tasuki Gap Pattern
Those who trade successfully, know that candlestick patterns like the downside Tasuki gap aren’t accurate enough to be traded on their own. You need to add more filters and conditions that ensure that you have a real edge in the markets. In addition to that, you also must ensure that you’re trading the pattern on a timeframe and market where it works well. We recommend that you make use of backtesting to determine where your edge lies.
However, in this part of the article, we wanted to show you some ways that we would go about and experiment with the downside Tasuki pattern, to try and find an edge. The things we’re going to show you are part of our own trading strategies, that we trade right at the moment!
Volumes provides a lot of information that’s hidden below the surface of the market. While the price chart only shows us how the market moved, the volume chart also tells us how many transactions that formed the market move. And knowing this, could help us sort of the bad trades from the good ones.
When we apply volume to our trading strategies, we often use conditions like those below:
- The volume of this bar is greater/or lower than the volume of the previous bar
- The volume is higher or lower than the volume moving average
- The volume of this bar is the highest or lowest volume x-bars back.
While all these conditions could be used with the downside tasuki gap, you could try and tailor the condition a little bit to the anatomy of the pattern.
For example, you might want to demand that the volume of the last bar is much lower than that of the two preceding bars, since it would show that the market carries out bearish moves with more conviction than bullish moves.
Be sure to test and see what works best with your market and timeframe!
The accuracy of a pattern is sometimes very dependent on the volatility levels of a market. As such, you might want to look at only taking trades in high or low volatility settings.
One of our favorite indicators for measuring volatility is ADX. Traditionally, readings above 20 signal a strong trend, and vice versa.
Another way of measuring volatility is to look at the range of the bars comprising the downside tasuki gap, relative to other bars. If you find that the pattern was part of a sudden increase in market volatility, meaning bigger candles, you might want to take the pattern more seriously!
One powerful method that’s not discussed so much, is using seasonal or time-based market tendencies. For example, many markets aren’t equally bullish or bearish on all days of the week, and as such, you might skip those weekdays that aren’t that profitable.
Here are some examples of where you could look for seasonal and time-based tendencies:
- Divide the month into three parts, and you might find that one half works better or worse
- If you’re trading intraday, gauge the impact of the time of day. Perhaps the pattern only works in the first half of the day?
- Odd and even days. Even if it might sound strange, you can find patterns that only work on even or odd dates!
By using seasonal and time-based tendencies like these, you could significantly improve the accuracy of the down Tasuki gap pattern!
Downside Tasuki Gap Trading Strategies
Now that we’ve had a look at how you could try to improve the performance of the pattern, we wanted to show you a couple of example trading strategies.
Please just keep in mind that the strategies below aren’t meant for live trading, but are examples of how you could go about creating your own strategy. The filters and conditions used below are such that are part of our own trading strategies, and that have proven themselves for us. As such, we believe that the following section will provide great inspiration for you.
Let’s get started!
Trading strategy 1: Downside Tasuki Gap and Gap distance
In this strategy we’ll analyze the size of the gap between the first and second candles, to find out whether a trade is worth taking or not. We want to take a trade only if the gap is quite big, indicating that the bearish sentiment is strong.
We’ll require that the gap is at least half the size of the average true range, to take a trade.
As such the rules to go short become:
- We have a Downside Tasuki gap
- The gap between the first and second candle is at least half the size of the average true range.
Then we’ll get out of the trade after 5 bars.
Trading Strategy 2: Downside Tasuki Gap with ADX
In this strategy, we’ll use the ADX, as we mentioned earlier in the article. However, we’ll use 5 as the length setting, instead of the default 14 periods. Quite often we find that ADX works well with much shorter settings than the default ones, so that’s the reason behind this choice.
Now, we’ll only act on a downside Tasuki gap if the 5 period ADX is higher than 30. Then we know that there is quite some volatility in the market.
As such, our rules become:
- We have a downside Tasuki gap
- The 5-period ADX is higher than 30.
Then we exit the trade after 5 bars.
In this article, we’ve had a closer look at the downside Tasuki gap. We’ve covered its meaning and definition, and also had a look some ways of improving the pattern, to build your own trading strategies.
Before we end this article, we just wanted to give you some important advice. NEVER TRADE SOMETHING THAT YOU HAVEN’T TESTED. The internet is littered with technical analysis that doesn’t work, and as such, you need to be vigilant!
If you want to learn more about testing and validating patterns like the downside Tasuki gap, then we recommend that you have a look at any of the following articles