What is an Abandoned Baby Pattern?

Key Highlights

• The abandoned baby pattern is a rare candlestick formation indicating a trend reversal in both bullish and bearish markets.
• A bullish abandoned baby occurs in a downtrend, while a bearish one appears in an uptrend.
• It resembles a Doji Star or cross with upper and lower shadows.
• Abandoned baby is considered a reliable pattern due to its clear, non-overlapping candles.

What is an Abandoned Baby Pattern?

An abandoned baby pattern definition refers to the formation of three candlesticks. In addition, it can form in both bullish and bearish trends. It is rare to find an abandoned baby in a candlestick chart. Whether it appears in an uptrend or downtrend, it signifies the reversal of a trend. In appearance, it looks like a Doji Star or cross with an upper and lower shadow. An abandoned baby has candles formed on either side of it in uptrend and downtrend, called parents. This is generally considered a strong signal for trend reversal, so don't ignore it. But you must be able to identify it correctly in order to react to it.

How to Spot Abandoned Baby Patterns?

After understanding abandoned baby pattern meaning, let’s see how to spot them. Look for these signs to spot an abandoned baby:

Bullish Abandoned Baby

It appears in a downtrend, indicating a bullish reversal. In a downtrend, the first candle is black or red. The next candle forms a star below the first candle's close. In addition, there is a third candle that opens above the Doji and closes within the first candle's body.

Bearish abandoned baby

A bearish abandoned baby appears in an uptrend, on the other hand. In a trend, the first candle is a green or bullish candle. Next, a Doji Star forms above the closing of the first bullish candle, followed by a downward candle.

The gaps between the candles and the Doji Star are important to note. There must be no overlap. Otherwise, it appears to be a morning star formation rather than an abandoned baby.

How Do You Interpret Abandoned Baby Patterns?

An abandoned baby is a reversal of trend. When it appears in a downtrend, it indicates that the selling spree is over and the bull is returning to the market. Conversely, when it appears in an uptrend, it indicates that buyers are leaving the market and sellers are taking over.

It is a rare pattern, but traders rely on it to adjust their positions. In comparison with other Doji formations, it is considered a more reliable indicator of a trend reversal. It's because each candle is distinct and doesn't overlap. In morning and evening star formations, the confirmation candle overlaps the first one.

One of the advantages of an abandoned baby is that it is a confirmed trend reversal pattern. Therefore, you can trade right away when you spot one in the trendline. It is not necessary to use other trading tools to confirm an abandoned baby. Even so, it's still worth comparing with other tools.

So, how do you interpret a bullish abandoned baby? As the psychology behind the formation suggests, the market is experiencing a significant selling-off in the trend - the first candle. A Doji forms afterwards, confirming that a levelling-off is occurring with the opening and closing prices being the same. As a result of the Doji, sellers are gradually losing control of the market while buyers are trying to gain control. A third, confirming candle forms in an uptrend and gaps higher than the Doji. When you spot an abandoned baby in an uptrend, you can interpret it similarly, but in reverse.

Trading Around Bullish Abandoned Baby

Abandoned baby can be traded in a variety of ways.

Entering the market

Traders enter into a long position when a bullish abandoned baby occurs, as it indicates a weakening downtrend. Just above the third candle, they place a stop-limit order. Since the market will rise, it could be used as a buying opportunity.

Stop-loss

Stop-loss limits are placed just below the down shadow of the Doji Star to prevent losses caused by unexpected changes. In some cases, traders would place their stop-loss below the downward wick of the third candle in order to limit their risk exposure.

Profit target

As the trading strategy does not indicate a profit target, traders must use other trading tools to confirm the limit, such as Fibonacci Retracement, moving oscillator, and moving average.

Conclusion

In terms of trading, abandoned baby are considered robust formations because they enable traders to place a tight stop-loss limit and identify resistance levels. Any deviation from the stop-loss limit indicates a false trend. Therefore, traders trust this formation more than other candlestick formations. When traders identify an abandoned baby pattern in an uptrend, they enter long positions. An abandoned pattern has a higher success rate than other patterns, so you can trade more than you normally would.