Bearish Abandoned Baby

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21 Aug, 2024

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What Is Bearish Abandoned Baby?

The Bearish Abandoned Baby is an essential technical analysis indicator. It is a rare type of candlestick pattern that signals the potential occurrence of a short-term downward trend. It includes three candles: one with increasing prices, another with the holding prices, and a final one with declining prices.

Technical analysts suggest that this pattern indicates at least a short-term turnaround in an upward-trending price. Traders who notice this pattern perceive it as a bearish signal. They employ it to leave a buying position and take short positions in the market.

What Is Bearish Abandoned Baby?

The bearish abandoned baby pattern is a crucial technical analysis indicator. It is an uncommon candlestick pattern that predicts the possible onset of a short-term downward trend.
The pattern indicates a reversal in the downward trend and can be used by traders to exit a buying position and enter a short position. Traders who recognize this pattern consider it a bearish sign.
The pattern is relatively easy to spot. However, the pattern may not always be trustworthy. In some instances, the pattern may deliver misleading signals.

Bearish Abandoned Baby Explained

The Bearish Abandoned Baby pattern is a candlestick pattern formed from three candles: the first one with increasing prices, the second one with the holding prices, and the final one with decreasing prices. This Abandoned Baby trend is an uncommon pattern that possesses a solid track record of predicting a short-term downward trend. The first candlestick is a huge bullish candle, followed by a Doji candle with a gap up.

This pattern signals a reversal of the downward trend and can be employed by traders to exit a buying position and enter a short position. Traders anticipate that the price will continue to fall, and bears are returning to action following the emergence of this pattern. The doji candle becomes a crucial signal for traders. Traders who detect this pattern perceive it as a bearish indicator.

How To Identify?

The signs to identify a bearish abandoned baby candlestick are:

The first candlestick is a long white candlestick that represents a solid upward trend.
The second candlestick, a doji, signifies market indecision. The doji opens and closes at or around the same price point, but it produces a long upper or lower shadow.
The third candlestick is a long black candlestick that represents a significant downturn. The black candlestick opens beneath the previous day's doji and closes deep into the white candlestick's actual body.

How To Read?

A bearish abandoned baby candlestick pattern indicates a downward reversal pattern in securities prices.

Source

In the chart from TradingView above, we can see that the early candlestick is green, tall, and emits small shadows. The doji candle is further followed by a price difference between its lowest and highest price points. A red, tall candle with tiny shadows subsequently follows it. This abandoned baby pattern effect can only occur if the doji candle shadows gap entirely below or above the shadows of the first and third day.

How To Trade?

The steps to trade the bearish abandoned baby pattern include the following:

Traders must look for the pattern in a stock's daily or weekly charts. It is comprised of three candles, making the pattern easy to recognize.
They must verify that the pattern exists by ensuring that the second candle is a doji, which indicates that the opening and closing prices are the same.
Then, the trader must enter a short position. They must wait for the third candlestick to close below the previous day's close before selling the stock or asset in this pattern.
Traders must set a stop loss above the high of the third black candlestick. These precautions help to reduce potential losses, and it is essential to establish a stop loss.
Next, the trader should set the profit target just above the support level at an acceptable risk-reward ratio. This level must reflect the desired profit and depend on the trading strategy.
Finally, after entering the trade, the trader must keep an eye on the price action. They must ensure that the price actions are suitable and aligned with the risk-reward ratio.

Examples

Let us study the following examples to understand this pattern:

Example #1

Let us assume that Jane is an analyst who was examining the stock prices of Rose Deal Company. She was studying the company's recent candlestick pattern charts. The company's trend demonstrated a doji-like candle, which was preceded by a gap between its lowest price and the previous candlestick's lowest price. The previous candlestick was a tall, white candlestick with little shadows. The doji was followed by a gap between the lowest and highest prices of the following candle. This is an example of the bearish abandoned baby candlestick pattern.

Example #2

On November 11, 2016, following a gap-down start, the Nifty50 fell below its critical support level of 8,300. It developed a huge bearish candle on the daily candlestick graphs. The index additionally reached a three-candle pattern, which generally indicates a reversal in an uptrend known as the Abandoned Baby. The selling pressure increased in the market when technical stop losses were triggered as the Nifty50 dropped below 8,500 and then 8,450.

Advantages And Disadvantages

The advantages of the bearish abandoned baby candlestick pattern are:

The pattern is established to be an accurate predictor of reversals on both short and long time frames. This implies that this pattern may be valuable for traders who are attempting to identify possible stock market reversals. The pattern's most significant advantage is that it provides an early warning when a bullish trend is about to end.
Traders who recognize the pattern and act swiftly can exit long positions before prices start to fall substantially. This abandoned baby pattern is considered to be reasonably reliable, especially when it emerges after a long uptrend because it indicates a sharp change in market condition and the possibility of a trend reversal. The pattern is relatively simple to identify, especially for traders who are new to the market.

The disadvantages are:

In specific scenarios, the pattern might generate inaccurate signals. If the market does not move in the anticipated direction, the traders may experience significant losses. Traders must employ additional technical indicators to verify the pattern's accuracy.
The pattern is not always reliable. Market circumstances, unforeseen events, and other factors may have an impact on price behavior. It may invalidate the pattern. The pattern is uncommon and does not frequently appear on charts, which limits its application as a trading indicator.

Bearish vs Bullish Abandoned Baby

The differences are as follows:

Bearish Abandoned Baby

This pattern suggests the reversal of the downturn, and traders employ it to exit the buying position and enter a short position. It appears at the end of an upward trend and comprises three candlesticks.
The first candlestick is a huge bullish candle, followed by a Doji candle with a gap up. The third candlestick opens lower than the Doji and is generally bearish.
After the creation of this pattern, traders predict that the price will continue to fall, bringing the bearish traders back into action.

Bullish Abandoned Baby

This pattern indicates a reversal in an uptrend, and traders use it to initiate a buy position. It occurs at the end of a downturn and consists of three candlesticks.
The first candlestick is a substantial bearish candle, followed by a Doji candle that gaps downward. The third candlestick starts higher than the Doji and is usually bullish.
Traders anticipate that the price will continue to rise, and the bulls will resume their buying activity once this pattern forms.

Frequently Asked Questions (FAQs)

Can the Bearish Abandoned Baby pattern be used with Elliott Wave Theory or other advanced technical analysis techniques?

Yes, this pattern is effective when combined with Elliott wave theory and other advanced technical analysis approaches. The pattern is employed to validate a possible market top on the basis of the Elliott wave theory. It comes at the end of an impulse wave's fifth wave, and it indicates that a reversal is likely to occur.

What Candlestick Pattern is Similar to Bearish Abandoned Baby Candlestick?

The bearish evening star pattern is similar to this abandoned baby pattern. It suggests the possibility of a bearish reversal. Both of these patterns have a similar structure in general and create a bearish reversal signal. However, the second candlestick is a collection of various candlestick shapes in the bearish evening star pattern.

How accurate is the Bearish Abandoned Baby Candlestick in Technical Analysis?

This abandoned baby pattern has proven to be an effective and valuable tool for recognizing possible future trend reversals. Market conditions determine the accuracy of this pattern. Moreover, the time range of the chart being assessed and the incorporation of other technical indicators along with the pattern may also determine the pattern's accuracy.