We have talked to a range of candlestick patterns on the Fx-generation site and now I have the joy of diving in to a infrequent blueprint famous for its efficacy.
Abandoned Baby Definition
The left infant candlestick formation is really a 3 pub reversal pattern that’s just like the evening and morning star formations and can be an incredibly reliable reversal signal the moment it does occur after a sharp increase or drop. As soon as it’s extremely much like the early morning star and evening star, it’s one significant difference. The actual shadows and bodies can’t overlap from pub 1 or 2 and 2-3. This leaves this blueprint very unique, infrequent, and reliable at precisely the similarly moment. As the creation has baby in its own name, in the same way the hiding infant absorb formation, it’s more in accordance with the island alteration design.
The deserted baby is really a speedy change in momentum out of the bulls into the grips or visa versa and generally grabs the flip hand guard. Rallies off an abandoned baby butt might be very quickly as short sellers will probably be made to pay fast. Alternately, declines following the deserted baby shirt can be as swiftly as most longs sell their rankings, planning to maintain the majority of these benefits.
Structure of Abandoned Baby
- The before all else candlestick is at direction of the main trend
- The next candle can be really a doji which openings from direction of the principal fashion, demonstrating no overlap with all the actual darkness or body of the preceding candle
- The next candle is at the contrary direction of their before all else time and openings in the contrary direction of this doji.
Chart Example of Abandoned Baby
In the above candlestick charting example, notice how the abandoned baby top comes in after a strong uptrend. This leaves the bulls trapped at the top of the formation with very little time to exit their winning positions. To the right of this formation is the abandoned baby bottom. This is the exact opposite of the abandoned baby top and is often the sight of a sharp short squeeze.
Congratulations! You are now familiar with the structure and characteristics of the abandoned baby candlestick pattern. Now it is time to apply trading techniques in the store.
Trading the Abandoned Baby Candlestick Pattern
We will now review a couple of chart examples, which show the amount behavior after an abandoned baby.
Abandoned Baby – Trend Increase
This is the 5-minute chart of Bank of America from June 2, 2015.
There is a clear downtrend, followed by an abandoned baby candlestick chart pattern, which is shown in the green rectangle. After we identified the pattern, a strong uptrend emerges and BAC’s asset amount increases a total of $0.25 per share. I know this doesn’t appear to be a lot of, however, Bank of America is really a Titanic of a share and exactly what it is that you might be quitting in benefits you overlook ‘t have to worry about in terms of risk.
Let’s now review another example of this unique candlestick pattern.
Abandoned Baby – Trend Decline
This is the 5-minute chart of Netflix from May 5, 2015.
In the chart above, we see a bearish trend followed by an abandoned baby reversal candle pattern. You can see the formation in the green rectangle. This time, the abandoned baby is a doji candle, which gives additional reliability to the pattern. The next candle opens with a gap from the abandoned baby, which confirms the pattern. The followed bullish move is so strong, that even the next candle after the confirmed pattern opens with a bullish gap.
This trend reversal leads to a $3.42 amount develop in Netflix.
Trading the Abandoned Baby
The good thing about the abandoned baby pattern is that if you spot it on the chart, you can trade it right away! It is not necessary to use additional trading indicators to confirm the signal, because the pattern is pretty reliable.
This doesn’t imply that the blueprint will continue to work 100 percent of this full time, therefore don’t go overboard!
Stop Loss Orders and the Abandoned Baby Pattern
When you trade the pattern you should always protect your trade with a stop loss order. The proper location of your stop should be underneath the wick of the middle candle of the formation. Also, feel free to put the stop as tight as possible.
Profit Targets with the Abandoned Baby Pattern
You can always use a moving average or an oscillator to exit a trade. The other option is to rely on basic amount action rules to close your profitable position.
Let me now show you how to implement a few techniques when trading the pattern.
Abandoned Baby – Stop Loss
Above is the 5-minute chart of Electronic Arts from Oct 20, 2015.
After a strong amount decrease, we see a candle which gaps down from the bearish trend (green rectangle). The next candle gaps up and we confirm a bullish abandoned baby. We go long when the last candle of the pattern closes the period. We put a stop loss order right beneath the lower wick of the abandoned candle as shown on the image.
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EA’s asset amount begins an impulse move higher and we start following the amount action. Notice that the before all else candle from the pattern and the previous candle form a resistance area (blue horizontal line). On its way up, EA breaks this resistance level. The amount starts consolidating and the previous resistance begins acting as support.
See the black arrows on the chart for reference.
The amount starts increasing afterwards and breaks the high of this congestion area.
Notice that the two low wicks during the amount hesitation help us build a bullish trend line – starting from the abandoned candle. The EA amount tests the trend a couple more times without breaking it. For this sense, we stay with our long position until the store closes.
In this trade, we generated a benefit of $0.74 (74 cents).
Money Management when trading the Abandoned Baby Pattern
The abandoned baby candle pattern is one of the most reliable patterns. As I showed you above, you can place tight stop loss orders when trading abandoned babies. This is because even a small contrary move will indicate that the pattern is false. In the trade above, our stop loss was 0.42% from our entry amount. Therefore, if you were to invest $40,000 of your purchasing power, a false pattern will lead to a maximum loss of $168.
However, the trade was successful and lead to a benefit of 1.1% which translates to $440.
Let’s now review another abandoned baby trade. This time though, we will rely on an exponential moving average to exit our trade.
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Abandoned Baby – Profit Targets
Above you see the 5-minute chart of JP Morgan Chase & Co. from Nov 3, 2015. I have placed a 30-period exponential moving average on the chart, which is the blue curved line.
The chart begins with a cost decrease, which I have marked with the red arrow. At the end of the amount decrease, we see a candle gapping down. This should be a signal for us that a potential abandoned baby might occur on the chart. The next candle gaps up and we confirm the pattern with its closing – we go long!
Let’s say we have a bankroll of $25,000. Since we have a day trading account we have a maximum purchasing power of $100,000.
Since the bullish and the bearish abandoned baby candlestick patterns are considered very reliable, we will invest 20% of our purchasing power. So, we invest $20,000 in a long trade based on an abandoned baby signal. We immediately put a stop loss beneath the lower candlewick of the abandoned candle. This is shown on the image above. In this trade, the stop is -0.45% from the entry amount. This way, if our trade is unsuccessful, we will lose $90 (20,000 x 0.0045).
After the confirmation of the pattern, JPM asset begins increasing. JPM reaches $65.86 and starts a corrective move. Notice that the amount decreases, but it finds support at our 30-period EMA.
JPM amount expands and breaks the $65.86 top and shoots to $66.06. Then we see a new decrease to the 30-period EMA. The amount starts crawling on the exponential moving average afterwards; however, the level sustains the pressure of the amount and we notice a new bounce from the 30-period EMA.
Although the amount makes more of a sideways move rather than an develop, we see a new top at $66.10. The followed amount action is in a bearish direction. The JPM asset amount breaks the 30-period EMA, which is our signal to exit the trade.
In this trade, we managed to catch a .71% develop in JPM. This breaks down to a benefit of $142 while risking $90. This gives us a 1: 1.58 risk-to-return ratio. Although this doesn’t seem really striking, $14-2 dollars here or you may soon add as much as and including mortgage payment by the close of the thirty day period.
Although the case I gave just uses 20 percent of one’s purchasing capability, you could always invest more in the event that you have quite tight ceases.
In comparison with other layouts, at which you sometimes risk 2 percent, the left baby doesn’t ask that you get wide stops.
Just rememberthat You need to work with a stoploss order if trading left infants. If you neglect ‘t place a stop, an unlucky trade might lead to tremendous losses, after all you are leveraging your capital.
- The abandoned baby is a three candle formation.
- It resembles the evening and the morning star, but the edge candle needs to gap from the two candles which sandwich the pattern.
- There should be no overlaps medially the middle candle and the two candles surrounding it. This way, the middle candle really looks like an abandoned baby.
- The abandoned baby is one of the rarest candle patterns.
- A stop loss order should always be used when trading the abandoned baby pattern. Its proper location is at the end of the lower candlewick of the abandoned candle.
- You can invest more than you usually invest in your deals when trading abandoned baby candle figures. There are two basic reasons for this:
- The abandoned baby is a pattern with a very high success rate.
- The stop loss when trading abandoned baby figures is usually placed very tightly. In some cases, you will risk less than 0.5% of your investment.
- Two methods for managing positions are:
- Price Action Rules
- Moving Averages (EMA in our example)