The abandoned baby is a reversal candlestick pattern that happens at the end of a bullish and bearish trend. Unlike other candlestick patterns that we have looked like the doji and engulfing, it is not popular.
But when it happens, it tends to be relatively accurate. It is therefore useful to know at least how this pattern looks like and how to take advantage of it thanks to some simple tips.
What is the abandoned baby?
An abandoned baby is a candlestick pattern that is made up of three candles. The first candlestick is usually a big one and is usually a sign that bulls are in control. It is then followed by another small candlestick. The final candle is usually a bigger one and in the opposite color as the first one.
The abandoned baby pattern mostly happens when a major event in the market like earnings or management changes. In this case, traders will rush to buy the asset, which will lead to a gap up. As the news fade, the asset will then start moving in the opposite direction. The chart below shows a bullish example of this pattern.
In other situations, the abandoned baby can happen in a combination of candlesticks. For example, as shown below, the AYX stock made a major bearish breakout in August 2020. It then remained in this range for a few days and then it made a gap-up in September. This pattern can also be said to be an island reversal pattern.
This kind of pattern can happen in both a bullish and bearish trend. When it happens during a bullish trend, it tends to result to a new bearish trend. This is known as a bearish abandoned baby.
On the other hand, if it happens during a bearish trend, it results to a new bullish trend. The chart below shows an example of the pattern on the Palantir stock.
Conditions for an abandoned baby
As we have noted when looking at other candlestick patterns, there are conditions that need to be met when they form. The same applies to an abandoned baby. The following conditions need to apply when it happens:
- First candle needs to be of the same colour as the original trend. For example, in a bullish trend, the first candle should be green in colour.
- Second candlestick should be a doji. A doji is a candle that has the same open and close. As we have noted before, a doji is usually a reversal pattern.
- Third candlestick is usually of the opposite colour of the first one. And most importantly, the bodies and wicks of the three candles don’t overlap.
Events that cause an abandoned baby
In most cases, this pattern happens after a major market event. Some of the top events that cause the abandoned baby candle are:
- Earnings – A corporate earning tends to result to major market actions, including an abandoned baby.
- Management change – When a company changes its management, it could lead to a pattern.
- Fed action – An abandoned baby can happen after an important Fed action such as when it hikes or hints to a possible rate hike.
- Economic data – Some economic numbers like employment and PMIs can lead to an abandoned baby.
Tips for trading the abandoned baby
There are several tips that you should always have in mind when trading this candlestick pattern. These are:
- Volume – Always look at the volume of the asset. When the pattern coincides with high volume, it means that there are more participants coming in.
- Wait for confirmation – After the candlestick pattern, always wait for further confirmation before you initiate a trade.
- Stop-loss – Further, you should always protect your trade by having a stop-loss. Ideally, you should place it a few points above the abandoned baby.
Pros and cons of this candlestick pattern
There are several pros and cons of using the abandoned baby pattern. First, it is relatively easy to identify pattern. You can see it closely in a chart. Second, it is a relatively easy to use pattern. Finally, it tends to be significantly accurate.
On the other hand, the main con is that it is not a popular pattern. This in itself is not really a con, but it does make it more complicated to learn about it.
Summary
The abandoned baby is a reversal pattern that happens mostly after a major event. While it is a rare pattern, it is a relatively accurate pattern that you can use.
External Useful Resources
- Abandoned Baby Candlestick Pattern – AskTraders
