DEFINITION of Bullish Abandoned Baby
The bullish abandoned baby is a type of candlestick pattern that is used by traders to signal a reversal in the current trend. This pattern is formed by three distinct candlesticks that show the following characteristics:
1. The first bar is a large red candlestick located within a defined downtrend.
2. The second bar is a doji candle (open equal to the close) that gaps below the close of the first bar.
3. The third bar is a large white candle that opens above the second bar and is used to show the change in trader sentiment.
As you can see from the chart below, the pattern precedes the trend reversal to the upside.
BREAKING DOWN Bullish Abandoned Baby
The bullish abandoned baby is a rare, but reliable, candlestick pattern that is useful in alerting traders to a possible trend change to the upside. Although this pattern is usually dependable, the accuracy of the reversal signal is significantly improved when it is used in conjunction with other technical indicators such as the MACD and RSI to confirm the reversal.
The pattern is similar to a morning star reversal but differs in that the body and shadows of bar two (the abandoned baby) cannot overlap any part of bars one and three. The opposite pattern to the bullish abandoned baby is the bearish abandoned baby. As well as visually eyeballing stock charts for the bullish abandoned baby, traders can also scan for the pattern using trading software. (For further reading, see: Why is the Bullish Abandoned Baby Pattern Important for Traders?)
Trading the Bullish Abandoned Baby
- Entry: Traders could enter on a break above the third bar in the pattern using a stop-limit order. Alternatively, a more conservative approach would be to place a limit order at the midpoint of the third bar and wait for a retracement to occur.
- Stop-Loss Order: To avoid getting stopped out prematurely, traders should place a stop-loss order below the lower shadow of the bullish abandoned baby bar. Traders who would like a more aggressive stop could place a stop order under the third bar of the pattern. Increased volatility often accompanies trend reversals, therefore, using a slightly wider stop may provide better results when trading the bullish abandoned baby.
- Profit Target: A profit target at a Fibonacci retracement level could be used. For example, traders might set a profit target at a 50% retracement of the downtrend that preceded the bullish abandoned baby pattern. Other options may include a profit percentage, or a break below a trendline or moving average. (To learn more, see: Strategies for Trading Fibonacci Retracements.)