Last Updated on 21 September, 2020 by Samuelsson
Candlesticks have become incredibly popular among new and experienced traders. With their eye-catching wicks and colorful bodies, they make reading the market a pleasure. In addition, they also form candlestick patterns, like the Upside Tasuki Gap.
The Upside Tasuki Gap is a bullish continuation candlestick pattern that forms in an ongoing uptrend. It consists of three candles, where the two first are bullish with a positive gap in-between, and followed by a negative candle that closes in the gap formed between the first two candles.
In this guide, we’re going to take a closer look at the upside Tasuki gap pattern. You’re going to learn its definition, meaning, and how to improve the pattern for live trading. We will also take a closer look at some trading strategies that use the upside Tasuki gap pattern.
Upside Tasuki Gap Definition
For a candlestick pattern to be called an upside Tasuki gap, it must meet the following conditions:
- The first candle must be bullish, and preferably quite tall.
- The second candle must gap up and end as a bullish candle
- Lastly, the third candle must be negative, and close within the gap zone created by the first two candles.
As said, a Tasuki gap is a bullish continuation pattern, meaning that if forms during an uptrend and signals that the market eventually will head higher.
What Does an Upside Tasuki Gap Tell Us About the Market?
Representing movements, every candlestick pattern signals something unique about the market, and how buying and selling pressure acted out. And while it might be impossible to know exactly what happened, analyzing market movements is a great exercise to improve one’s understanding of the market, and not the least to spark new ideas that could end as profitable trading strategies.
Here is what might have happened inside the market as it formed an upside Tasuki gap
Coming from a bullish trend, market sentiment is positive, and most market participants expect that the market will head higher. And much to their liking, the market forms the first candle of the Tasuki pattern, which is a tall positive one.
The positive market sentiment spills over to the next trading session, causing the market to gap up, and continue its winning streak. The second candle becomes a long positive one.
However, upon having produced two long and positive candles, with a positive gap in between, market participants are becoming increasingly worried that the market has become overbought and is headed for a correction.
Their fear seems to hold true, and the next candle turns into a bearish one that closes below the open of the previous bar.
However, the fact that it didn’t manage to get past the gap, which is a major resistance level, makes buyers believe that the bearish bar was nothing more than a temporary pullback. As such buying pressure increases and pushes prices higher, and the bullish trend continues.
Upside Tasuki Gap Example
Here follows an example of the upside Tasuki gap.
How to Trade the Upside Tasuki Gap: How to Improve the Pattern
Even if the upside Tasuki gap on its own is believed to signal a bullish continuation of the trend, most traders wouldn’t take the signal as is. In most cases you will have to impose some filters to remove enough bad trades so that the edge gets strong enough. You also need to ensure that you trade the right timeframe and market where the upside tasuki gap has some potential. We recommend that you use backtesting for this.
Having said this, let’s have a look at some types of filters you could use to make the pattern worthwhile. The filters and conditions we’re going to share with you are part of some of our current trading strategies. As such, we believe that you will find a lot of value in hearing about them!
The Strength of the Uptrend.
Being a continuation pattern, the upside Tasuki gap may very well be impacted by the strength of the uptrend. Depending on the market and timeframe it might perform better or worse in low volatility environments versus high volatility environments.
When we measure the trend strength of a market, we often use any of the following filters or indicators:
- The close is above the exponential moving average
- The close is above the upper Bollinger band.
- ADX is higher than 20
Out of these, we would say that the last one is our favorite. ADX is part of many of our trading strategies, and is one of those trading indicators that work well across many markets and timeframes.
The volume in a market shows us the conviction behind the moves and provides valuable clues about the significance of price patterns. Generally, when more trading volume supports a price move, we can consider it more significant than if it was formed with little volume.
When we use volume in our trading, we like to use conditions like those below:
- The volume of this bar is higher or lower than the volume of the preceding bar
- Volume is higher or lower than the moving average of volume.
Volum is a little different from normal market data in that there often are sharp and sudden moves just between two bars. For example, it’s not uncommon that the volume of one bar is thrice the size of that of the previous bar. Keeping this in mind, you might want to not only demand that the volume is higher or lower, but use a multiplier to ensure that the difference is significant.
For example, you could define that the volume of this bar must be higher than the previous bar’s volume times 3. Then you have a significant difference, that should leave some marks on the performance of the pattern.
Normally we just use data from the market we’re trading. However, there are other data feeds that could be highly relevant to continuation patterns like the upside Tasuki gap.
One example of such a data feed is the VIX. Comparing the number of outstanding put options to outstanding call options, the VIX becomes a measure of the market’s expectations of future volatility levels. As such it’s a market sentiment indicator that we could use to filter out bad trades.
If you want to learn more about the VIX, we recommend that you take a look at our guide to VIX.
When the VIX is rising, it indicates that market participants are becoming increasingly fearful, believing that a market downturn is imminent. Conversely, when the VIX shows low readings, the market sentiment is more bullish.
As such, the most intuitive use of the VIX would be to only take a bullish continuation pattern like the upside Tasuki gap, if the VIX is low. However, we believe that you should try both and see what works best for your market and timeframe.
Here are some filters you could use on the VIX index to determine whether the reading is high or low.
Upside Tasuki Gap Trading Strategies
Now that we have shown you some common ways that you can improve the performance of the upside Tasuki gap, we wanted to show you some examples of trading strategies.
Just keep in mind that the strategies presented haven’t been tested on historical data. You will have to test and see what works best on your market and timeframe, preferably using backtesting.
However, we’ve only included filters that are part of successful trading strategies that we trade ourselves. As such, the following strategies will be great as inspiration!
Trading Strategy 1: Upside Tasuki Gap with Gap Condition
One integral part of the upside Tasuki gap pattern, is the gap that’s formed between the first two bullish candles.
Now, the size of the gap might be important to the strategy. That is, if the gap is big, it signals that the market is more bullish.
As such, this trading strategy example will include a gap condition, where we want the gap to be at least half the size of the Average True Range ATR
So the rules to go long become:
- We have an Upside Tasuki Gap
- The gap between the first two candles is at least half the size of the ATR
Then we exit the trade after 5 bars
Trading Strategy 2: Upside Tasuki Gap with Breakout Over High
With the second trading strategy, we’ll add a condition that applies after the pattern has been formed, to make sure that the market continues in our wanted direction.
More specifically we’re going to demand that the market closes above the high of the pattern, before we take a signal. So, you could say that we are looking for confirmation in the form of a breakout over the previous high!
Now, one more thing we could look for here, is the time it took for the market to break out. If the first bar after the pattern closed above the high, it might be more bullish than if it took some extra bars for the market to break out.
Following this, we’ll demand that the breakout took no longer than 5 bars to occur after the upside Tasuki gap was formed.
As such, the conditions for the strategy become:
- There is an upside Tasuki gap
- The market closes above the high of the bar, within 5 bars after the forming of the pattern.
Then we exit the trade after 5 bars.
In this article we’ve covered the upside Tasuki gap and how to use it in trading. We’ve covered its definition and meaning, and have had a look at how the pattern could be improved for live trading.
However, before we end there is once piece of advice we want to share with you. NEVER TRADE A STRATEGY THAT YOU HAVEN’T TESTED. The truth that most beginning traders don’t want to realize, is that most technical analysis that’s out there doesn’t work at all. In order to find those few things that actually work, you’ll have to use backtesting and test your ideas on historical data.
If you want to read more about this, the following articles will be of great help to you!