Shape:
The downside tasuki gap is a bearish continuation candlestick pattern that typically forms during a downtrend.
It consists of three candles: a long bearish candle, a second bearish candle that gaps down from the first candle, and a third bullish candle that partially fills the gap but does not close it completely.
This pattern indicates a brief consolidation or minor pullback within a downtrend before the continuation of the bearish movement.
Success Rate:
Historically, the downside tasuki gap has a relatively high success rate, especially when it appears in a strong downtrend.
Success rates can vary, but many studies suggest that this pattern has a success rate of around 60-70% in achieving its expected bearish continuation.
Sell:
Enter a sell position when the price remains below the partial gap fill, confirming that the pattern is intact.
The confirmation candle should ideally be accompanied by increased volume to strengthen the bearish signal.
Take Profit (TP):
Measure the height of the first bearish candle and project this distance downwards from the closing price of the third candle to set the initial take profit target.
Example: If the height of the first bearish candle is Tk.5 and the closing price of the third candle is Tk.50, the target would be Tk.45.
Stop Loss (SL):
Place the stop loss slightly above the high of the second bearish candle or above the gap region.
This helps limit potential losses if the pattern fails and the price reverses.
Buy:
Consider buying only if the price completely closes above the gap region, indicating a failure of the bearish continuation pattern.
Otherwise, the pattern is primarily used for bearish trades.
Profit Trailing:
Use a trailing stop to lock in profits as the price continues to move downward.
Adjust the stop loss level downwards as the price falls, keeping it a set distance (e.g., a percentage or taka amount) above the current price.
Lot Size:
Determine the lot size based on your risk tolerance and account size.
Ensure that the potential loss (difference between entry price and stop loss) does not exceed a predetermined percentage of your account balance (e.g., 1-2%).
Risk-to-Reward Ratio:
Aim for a favorable risk-to-reward ratio (e.g., 1:2 or higher), where the potential reward is at least twice the potential risk.
Leverage:
Use leverage cautiously. While leverage can amplify gains, it also increases potential losses. Ensure you have a clear understanding of how leverage works and its impact on your trades.
Other Conditions:
Confirm the pattern with increased volume, indicating strong selling interest.
Monitor overall market conditions and sentiment to ensure alignment with the bearish outlook.
Caution:
False patterns can occur, leading to potential losses. Always wait for confirmation before entering a trade.
Market volatility and external factors can influence the pattern's reliability.
Avoid trading the downside tasuki gap in a weak or bullish market, as the success rate may decrease.
Pros and Cons of the Downside Tasuki Gap Pattern
Pros:
Bearish Continuation Signal:
The downside tasuki gap typically forms in downtrends and signals a continuation of the bearish move, aligning with the broader market trend.
Clear Structure:
The pattern's structure is well-defined, making it relatively easy to identify and trade.
Higher Success Rate:
The pattern has a relatively high success rate, especially when it appears in a strong downtrend and is confirmed by volume.
Clear Entry and Exit Points:
The pattern provides clear levels for entry (below the partial gap fill) and exit (stop loss above the gap), facilitating trade planning.
Cons:
False Patterns:
Like any pattern, the downside tasuki gap can sometimes fail, leading to potential losses if not managed properly.
Volume Requirement:
Successful patterns often require a significant increase in volume. If the continuation occurs on low volume, it might be less reliable, leading to potential failure.
Market Conditions Dependency:
The pattern's effectiveness can diminish in volatile or bullish market conditions. It is most reliable in a stable or bearish market environment.
Short-Term Nature:
The downside tasuki gap is relatively short-term, meaning traders need to act quickly to capitalize on the potential continuation move.
Trading Psychology of Downside Tasuki Gap
Formation:
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Initial Downtrend: The pattern typically forms during an existing downtrend. Sellers dominate, and selling pressure is strong.
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Temporary Pullback: The third bullish candle represents a temporary pullback or consolidation within the downtrend. This indicates a brief period of profit-taking or hesitation among traders.
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Bearish Confidence: The failure of the bullish candle to close the gap suggests that sellers have regained control, reinforcing the continuation of the downtrend.
Market Sentiment:
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Sellers’ Confidence: As the pattern forms, sellers become more confident that the downtrend will continue. The inability of the third candle to close the gap reinforces this sentiment.
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Buyers’ Weakness: Buyers attempt to push the price up during the third candle, but their efforts are weak and unable to reverse the overall downtrend.
Breakout Psychology:
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Anticipation: Traders who recognize the downside tasuki gap anticipate a continuation of the downtrend. They prepare to enter sell positions upon confirmation.
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Volume Increase: A significant increase in trading volume during the confirmation of the third candle reassures traders that the pattern is legitimate.
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FOMO (Fear of Missing Out): As the continuation occurs, more traders rush to sell, fearing they might miss out on the downward move, which further drives the price down.
Post-Breakout:
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Validation: Successful continuation validation (price remaining below the partial gap fill with increased volume) reassures traders that the pattern is legitimate.
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Profit-Taking: Some traders might take profits near the target price derived from the first bearish candle’s height.
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Trailing Stops: Experienced traders use trailing stops to lock in profits while allowing for further downside potential.
Failure and Risk Management:
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False Patterns: Not all patterns succeed. False downside tasuki gaps can occur, leading to trader frustration and potential losses. Proper risk management, such as stop-loss orders, is essential.
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Reevaluation: If the pattern fails, traders reassess their strategy and may look for other patterns or signals to guide their next moves.
General Tips for Managing Trading Psychology:
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Patience: Wait for the pattern confirmation before entering a trade to avoid false signals.
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Discipline: Stick to your trading plan, including predefined entry, exit, and stop-loss levels.
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Emotional Control: Manage emotions like FOMO and fear by focusing on your strategy and risk management principles.
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Continuous Learning: Stay informed about market conditions and continuously improve your technical analysis skills.
Understanding the psychology behind the downside tasuki gap can help you make more informed trading decisions and better anticipate market movements.