What is a Downside Tasuki Gap?
A Downside Tasuki Gap is a candlestick formation that is commonly used to signal the continuation of the current downtrend. The pattern is formed when a series of candlesticks have demonstrated the following characteristics:
1. The first candle is red or back (down) within an existing downtrend.
2. The second candle gaps below the close of the previous bar and is also red (down).
3. The last bar is a white or green (up) candlestick that closes within the gap of the first two bars. It is important to note that the white candle does not need to fully close the gap.
- The pattern occurs in a downtrend and signals the potential continuation of that downtrend.
- It is formed when there is a down candle, a gap lower into another down candle, and then an up candle that closes within the gap.
- The pattern doesn't indicate how far the price may decline (if it declines) following the pattern.
What Does the Downside Tasuki Gap Tell You?
The Downside Tasuki Gap (also known as the Bearish Tasuki Gap) is a three-candle continuation pattern. In order to spot this pattern, keep the following criteria in mind.
First, a clear downtrend must be present, and there must be a large red/down candle present (candlestick chart colors are customizable).
Second, following the candle above, the price must gap down and form another large red/black candle.
Third, a white/green candle must follow the red/black candle. The green/white candle must open inside the red candle’s real body and close above it. This candle should not close the gap between the first two candles.
Of the three candles involved, the first two must be red/black and the third will be green/white. In order to qualify, the second and third candles must be opposing colors.
The Downside Tasuki Gap pattern’s shows the power of the downtrend; the bears are in control and exhibiting their strength. This downward strength is then amplified, shown by the price gapping lower and then a new red candle forming. However, a pause follows this movement as the bulls attempt to force the price up. If the price is unable to fill the gap, and the price starts to drop again, the bulls will likely flee, leaving the existing downtrend to resume.
Some traders opt to enter short near the close of the white candle, assuming the downtrend will continue. Others prefer to wait for the price to drop below the low or open of the white candle. This provides some confirmation that the price is dropping again and the downtrend may be resuming.
The Downside Tasuki Gap has a counterpart: the UpsideTasuki Gap. It can be spotted by displaying the same criteria above, but in the opposite formation and during an uptrend.
Example of How to Trade the Downside Tasuki Gap
The Nvidia Corp. (NVDA) chart shows a downside Tasuki gap pattern. The price is in a short-term downtrend when the pattern appears. There is a down candle, followed by a gap into another down candle. There is then an up candle which penetrates into the gap but doesn't close it.
Traders could enter short near the close of that white candle, with a stop loss above the close or above the high of the first candle in the pattern.
Following the up candle, the price moves lower. In this case, gapping down again.
The downward movement is brief, though, and the price reverses higher shortly after.
The Difference Between a Downside Tasuki Gap and a Down Gap Side-by-Side White Lines Pattern
The Tasuki gap down is partially filled by an up candle. A gap down side-by-side white lines pattern is a gap down followed by side-by-side candles. The pattern also marks a continuation of the current trend.
Limitations of Using the Downside Tasuki Gap
The pattern is three candles in a sea of other price bars. By focusing on this pattern a trader could lose context. For example, the short-term trend may be down when this pattern occurs, but the longer-term trend may up. Therefore, the price may rise shortly after the pattern, in alignment with the longer and more dominant trend.
The pattern is not very common, and therefore will present limited trading opportunities.
As indicated, context is important with this pattern. The stronger a downtrend and selling pressure the more likely the price will continue lower. Although the price action is choppy, rangy, or in a weak trend, the odds of success on the pattern deteriorate.
There is no indication how far the price may fall, or if it will fall at all, after the pattern. This requires another form of analysis.
Before trading any candlestick pattern, look for historical examples of how the pattern performed, including both winners and losers.