The Abandoned Baby pattern is a small candlestick that does not have a body. It is categorized as a Doji given that it does not have a body. Here, you will learn how to use the Abandoned Baby pattern as part of your binary options trading strategy.
How to Use the Abandoned Baby Pattern in Binary Options Trading
This pattern forms at the top or bottom of an upward trend or downtrend with a distinctive gap occurring between the abandoned baby pattern, the candle before it and the one after. The pattern cannot be identified as an Abandoned Baby unless the gap exists.
The Abandoned Baby is essentially a reversal pattern that is characterized by three bars. It is one of the few reliable signals indicating an impending reversal, especially when it forms after a sharp rise in prices or a sharp decline.
It is common for traders to confuse the Abandoned Baby formation with the morning and evening star patterns, because they almost look alike. However, the difference is that the body and wick of the abandoned baby do not ever overlap. As such, this formation is quite rare but reliable as well.
This pattern forms when there is a sharp and fast shift from strong bulls to bears, and from strong bears to bulls. Rallies that occur off the bottom of this pattern are often fast, requiring short sellers to cover equally fast. At the same time, price drops that occur at the top of this pattern are equally rapid given that most long traders are selling their positions so they can keep their profits and mitigate losses.
How To Identify The Abandoned Baby Pattern
This pattern has three main characteristics that identify it from other similar reversal formations. Remember that this is a three bar candlestick formation—the first candlestick forms in the direction of the prevailing trend. The second candlestick does not have a body i.e. it is a doji formation and forms a gap in the direction of the prevailing trend. This second candlestick does not overlap with the shadow or body of the previous candlestick. Lastly, the third candlestick forms in the opposite direction of the initial day of trading and forms a gap in the opposite direction of the second candlestick.
How to Trade the Abandon Baby Pattern
The Abandoned Baby pattern can be a bullish or bearish reversal formation. When this pattern forms, it is a signal that the prevailing trend will change direction. However, it is not an indication that the entire pattern will change—it is common for this pattern to form at the top of a small uptrend, which occurs within a downtrend. Afterward, the uptrend will end but the prevailing downtrend will continue.
Bullish abandoned baby pattern
When this pattern forms at the bottom of a downward trend, it is a bullish formation. This is a rare formation but when it does form, it is very valuable in identifying an impending reversal in a major downward trend.
When this bullish pattern forms, three unique candlesticks identify this pattern. The first candlestick is large and red in color and occurs within a distinct downtrend. The second is a doji candlestick that forms at the bottom of the first candlestick while the third and last bar is large and white in color and opens at the top of the second bar. This third candlestick indicates changes in market sentiments.
Bearish abandoned baby pattern
The bearish abandoned pattern forms at the top of an upward trend. The bearish formation is identifiable using three distinct characteristics. The first candlestick is large and white and is located within a distinct upward trend. The second candlestick is a doji that forms a gap at the top of the close of the first candlestick while the third candlestick is big and red and opens at the bottom of the second candlestick.
In summary, the abandoned baby pattern is a rare formation but it is a strong signal of an impending reversal in either an uptrend or downtrend. In binary options trading, this pattern must have a gap between the open and close prices of the successive candlesticks and shadows to be used as a valid trading signal.