Definition Of Advance Block

The advance block is a three-candle bearish reversal pattern that appears frequently on candlestick charts, although in practice the formation often leads to a bullish continuation.

Breaking Down Advance Block

The advance block candlestick pattern is a bearish reversal pattern, with the following four characteristics:

  1. The market is engaged in an uptrend or a bounce within a downtrend.
  2. Three white candles have progressively shorter real bodies.
  3. The open of the second and third candles lie within the real body of the previous candle.
  4. The upper shadows of the three candles gradually become taller – especially the shadow of the last candle.

This chart pattern performs best during temporary uptrends and pullbacks within larger-scale downtrends and when candles have long real bodies. The bearish reversal is confirmed when subsequent price bars trade through the midpoint of the first candle’s real body.

The advance block pattern was relatively rare in the years before algorithmic trading but has grown more common this decade, reflecting a greater frequency of intraday counter swings. Even so, traders shouldn't take buy or sell signals from the advance block pattern alone. Instead, use the pattern as confirmation for other chart patterns or technical indicators that show greater reliability. In addition, traders should look for tall real bodies to maximize the odds for a reversal, as opposed to bullish continuation.

Advance Block Trading Psychology

The security is trending higher as part of a broader uptrend or a bounce within a downtrend. The first candle generates strongly bullish energy with a rally that reaches a new high. Bulls prevail in the second candle but not before a lower opening that approaches the midpoint of the prior candle. The weak opening waves a red flag because bulls expect higher prices after strong price action in the first candle. The slightly lower opening on the third candle adds to fears that buying power is drying up but the security moves higher intraday like it did during the previous two sessions. It reverses before the close, giving up the majority of gains, indicating that traders are taking profits or establishing short sales. A sharp thrust lower in the next few sessions confirms a reversal.  

This technical pattern is violated, signaling bullish continuation, if the security continues to gain ground and trades above the third candle shadow.  The bull signal is stronger when the close holds above the shadow of the third candle, instead of a pullback generating another long shadow.