Candlestick patterns are a great way for traders and investors to analyze and predict the future price movements of an asset. Studying candlestick patterns can also help identify trend reversals or continuations. The abandoned baby pattern is one such candlestick pattern that can help identify trend reversals.
The abandoned baby candlestick pattern is a three-candlestick pattern that can help traders identify reversals in trends. The pattern can be seen as a bullish as well as a bearish signal and can prove to be a reliable indicator for significant changes in the price trajectory. The three-candlestick pattern is similar to the morning star and evening star candlestick patterns but can be easily differentiated by certain features.
Being a reversal candlestick pattern, the abandoned baby chart pattern is usually seen at the end of an uptrend or downtrend. However, the pattern is rare due to the specific price movement criteria that must be met to complete the pattern.
The abandoned baby pattern is a three-candle pattern which means the pattern is only confirmed after the third candle is completely formed. Since the pattern is a reversal pattern, it is found usually at the end of a trend and the successful completion of the pattern indicates a reversal in the trend.
Here are the three candles that make up the abandoned baby chart pattern:
The second candlestick is a doji, which closes near its opening price, resulting in a small body. For the abandoned pattern to be confirmed, there should be no overlapping between the first and the second candlesticks, and the second and third candlesticks. As a result, the small doji candle resembles an abandoned baby.
The abandoned baby pattern can be a bullish abandoned baby pattern or a bearish abandoned baby pattern. The nature of the pattern depends on the primary trend of the price.
A bullish abandoned baby pattern occurs towards the end of a downtrend signifying a reversal.
The bearish abandoned baby pattern occurs towards the end of an upmove.
The key difference between the abandoned baby chart pattern and the morning or evening star chart pattern is that the first and third candles do not overlap with the second candle in the abandoned baby. Meanwhile, the evening or morning star does not require the second candlestick to be a doji or to open with a gap.
However, in some cases, traders make an exception to the abandoned baby candlestick pattern which validates the pattern even if the second candle does not open at a gap.
The abandoned baby chart pattern is important for the following reasons:
The abandoned baby pattern signifies a sudden change in the momentum and direction of the market. The pattern indicates that certain factors have resulted in a sudden reversal in the prevailing trend. The second candlestick in the pattern is a doji candlestick which is an indicator of indecisiveness. When the market is indecisive, a push or pull in either direction can result in significant price changes.
In the case of an uptrend, the formation of a bearish abandoned baby might lead to panic among the bulls who might decide to book profits while bears enter the market pushing the price down further. Similarly, in the case of a bullish abandoned baby, short sellers might be forced to cover their positions which would push the price up further as the number of buyers increase.