Abandoned Baby Definition
The abandoned baby candlestick formation is a three bar reversal pattern that is similar to the morning and evening star formations and is a very reliable reversal signal when it occurs after a sharp rise or drop. While it is very similar to the morning star and evening star, it has one key difference. The real bodies and shadows cannot overlap from bar 1 to 2 and 2 to 3. This makes this pattern very unique, rare, and reliable at the same time. While the formation has baby in its name, just as the concealing baby swallow formation, it has more in common with the island reversal pattern.
The abandoned baby is a rapid shift in momentum from the bulls to the bears or visa versa and typically catches the other side off guard. Rallies off an abandoned baby bottom can be very rapid as short sellers will be forced to cover fast. Conversely, declines after the abandoned baby top can be just as fast as many longs sell their positions, aiming to keep most of their profits.
Structure of Abandoned Baby
- The first candlestick is in the direction of the primary trend
- The second candle is a doji which gaps in the direction of the primary trend, exhibiting no overlap with the real body or shadow of the previous candle
- The third candle is in the opposite direction of the first day and gaps in the opposite direction of the doji.
Chart Example of Abandoned Baby
In the above candlestick charting example, notice how the abandoned baby top comes in after a strong uptrend. This leaves the bulls trapped at the top of the formation with very little time to exit their winning positions. To the right of this formation is the abandoned baby bottom. This is the exact opposite of the abandoned baby top and is often the sight of a sharp short squeeze.