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The Abandoned Baby – Creatively Named Candlestick Reversal Signal

Some candlestick names are graphically descriptive. One of these is a three-day formation called the abandoned baby.

In the bullish version, the first day is a black session followed by a downside gap; and then a doji (a day in which opening and closing prices are the same or very close). This cross-shaped second day is the baby of the formation, and it is followed by an upside gap. The third and final day is a white day.

In the bearish version, you see the exact opposite. The first day is a white session, then an upside gap and the doji (baby); then a downside gap and a black day. Both bullish and bearish abandoned babies are shown in the illustration.

The abandoned baby is an exceptionally strong signal when it shows up in reversal position. The bullish variety, when found after a downtrend, is a sign of strong turnaround and a coming upside move. The bearish version, when it shows up at the end of an uptrend, tells you that a strong downtrend is going to take place.

When you see this pattern in hindsight, the reversal signs are quite obvious. It's unusual to see the attributes all at once:

1) two consecutive gapping days, in opposite directions.

2) the middle day a doji, or as swing traders call it, a narrow range day or NRD.

3) an initial final stage in the existing trend (session one) leading to a post-gap session moving in the opposite direction.

If you also see the abandoned baby develop along with a volume spike, especially in the third session, then the signal is nearly certain to be the real thing. Acting on it, you will time your time accurately most of the time.

When the abandoned baby does fail, it is likely to happen very quickly. Look for gaps much wider than the typical one-session gap. This could mean that the change in price levels is too uncertain to be reliable. Even so, when you see the abandoned baby appear at the end of the trend (especially if the trend was strong), you don't usually need hindsight to estimate that a reversal is probably underway.

Even so, act with caution. Acting on reversal signals makes sense in timing both entry and exit, but decide in advance how much you are going to risk on entry. A lot of swing trading capital is lost when traders, relying on a "sure thing," put too much money on a single trade. The momentary greed is likely to come back and bit them on the other side of the trade. No formation or pattern is 100% certain, and the abandoned baby, like any other candlestick formation, can and does fail.

It also helps if you can independently verify the indicated reversal with other tests, like a failed poke at support or resistance like a head and shoulders or double top or bottom; triangle formations; or other technicals like RSI, OBV, or MACD. The more immediate information you have available, the more reliable your signals.

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