Disclaimer: This blog post will give a simple definition of this trading pattern, and it will not teach you how to trade. We suggest you read Candlesticks Basics before proceeding, in case you are not familiar with green candlesticks, red candlesticks, and Dojis. And no worries, no babies were harmed during the making of this blog post. ❤
Trading can get pretty funny, whoever comes up with these names? Abandoned Baby, really?
An Abandoned Baby in trading is a rare & highly reliable reversal chart pattern formed by three candlesticks which could be bullish or bearish.
Now before we continue, I have a curious story to share with you about my experience learning this pattern. But feel free to skip the story and go straight to an extended definition of the pattern further along, if you please.
The name of the pattern called my attention when a co-worker recently introduced me an indication of the pattern on Investing.com BRL/USD on October 8th, 2018, as you can see the image below a sign on the 9th to confirm.
After studying the pattern, I went crazy to try to understand the chart above because I COULD NOT FIND THE ABANDONED BABY PATTERN I had learned- in it!
I thought I needed some expert’s advice to be able to see it.
Sure enough this week Investing.com fixed the error…it was NOT an abandoned baby after all. This is a big problem in the trading business because at the low point traders BUY stocks at a low price believing there will be a reversal according to the pattern (in this case the Bullish Abandoned Baby which indicated that the market was going to shoot up) to SELL during the uptrend for a higher price and make that $$$. This is a mistake that has probably cost many people a lot of money, at least the people who are not very familiar with the pattern to identify it was a mistake.
As you can see for yourself on the chart above over Oct. 9th, there is no sign of an Abandoned Baby any longer. I’m not sure if I should give myself the props for spotting it first (lol) or crying after studying and seeking answers for almost 2 weeks. Anyhow…
What is an abandoned baby chart pattern after all?
Bullish Abandoned Baby
It is characterized by a downtrend, a large bearish (red) candle on the first day; a Doji should follow on the second day that should gap below the closing of the first day, and the third day should be a large green candlestick which opening price must be above the second candlestick.
This formation shows the markets drastic change in sentiment, and it is an indication that it will go in the other direction or uptrend in this case.
This is what it should look like:
2. Day one large red candlestick
3. Day two is a Doji that opened and closed below day 1 creating a gap that crosses right under day three. (This breathing gap is what characterizes and distinguishes the Abandoned Baby – see last image.)
4. Day three a green candlestick that has an opening price above the second candle stick (or the doji)to confirm the pattern.
Now that looks like a bullish abandoned baby!
DOJI: is when the market opens and closes pretty much at the same price. This is a reflection of the market´s sentiment which indicates indecision, not moving anywhere, so the day closes the same or almost the same as it opened.
Bearish Abandoned Baby
A Bearish AB is characterized by an uptrend to signal a downtrend reversal. A large green candle on the first day will be followed by a GAP created by a Doji that has a higher open and close price than day 1, and the third day a red candlestick will follow. It is the same exact process as with the Bullish AB but in the opposite direction exactly.
1. Up trending;
2. Day 1 Large green candle;
3. Day 2 Doji that opened and closed above day 1 creating a gap that crosses right over day 3 (This breathing gap is what characterizes and distinguishes the Abandoned Baby – see the last image.)
4. Day 3 Large Bearish candle to confirm the pattern.
The (breathing) Gap
This gap is an important breathing gap that must be seen in an abandoned baby whether bullish or bearish. It defines the pattern and separates it from the Evening Star Pattern and the Morning Star Pattern, which follow pretty much the same characteristics as the AB but without the breathing Gap.
In a Bullish Abandoned Baby, the Doji should be under the gap that should cross under day 1 and 3 in a straight line.
In a Bearish Abandoned Baby, the Doji should be above the gap that should cross over day 1 and 3 in a straight line. (See the image below)
Boy am I glad I saved the images for my studies! Now I get to share with you what it really should look like and what it shouldn’t with a story to tell. Hope this has been fun and helpful.
See you in the next weirdly named pattern (lol)