How to Trade the Two Black Gapping Continuation Pattern.

What is the Two Black Gapping Continuation Pattern?

The Two Black Gapping Continuation Pattern is a bearish continuation pattern that occurs on a downtrend to signify the continuation of such a trend. The pattern is made up of two bearish candlesticks which are preceded by a Gap Down in price.

Bearish candlesticks appear black in the traditional MetaTrader trading platforms hence the name Two “Black” Gapping Continuation Pattern – note the color in which bearish candlesticks appear on Olymp Trade is red though.

The first candlestick of the pattern gaps to open lower than the preceding candlestick’s low price.

The second candlestick of the pattern opens lower than the opening price of the first and closes lower than the close price of the first.

Notably, the second candlestick of the pattern has its high price at a level below the high price of the first.

Those two bearish candlesticks which form the pattern can be any bearish candlestick except the Doji candlestick.

Any other single candlestick can fit the Two Black Gapping Continuation pattern, whether short or long, as long as the specifications of the level of the second candlestick’s body and high price levels in respect to the first are met.

A Gap Down before both of the candlesticks is of course one thing we cannot overemphasize.

 

If you consider all those conditions we have outlined so far, it should not be difficult for you to identify the Two Black Gapping Continuation Pattern. Once you identify the pattern, trading it should also not be a challenge because that is the burden of today’s post.

Candlestick patterns on their own, may not be enough in making trading decisions.

It is therefore recommended that the Two Black Gapping Continuation Pattern be used alongside a Volume Indicator tool. Volume indicators help traders identify the relationship between price and volume.

An increase in trading volume almost always results in an increase in price. However, these events may not occur at the same time as we shall see. Examples of these indicators/oscillators are;

• Chaikin Money Flow.
• Money Flow Index.
• Volume RSI.
• Volume price trend indicator.
• Accumulation/Distribution.

For Fixed Time Traders, note that this pattern is best traded on a trade duration 3 to 10 times the chart candlestick time frame.

If you have set your chart candlestick time frame to 1 minute, for example, your trade duration should range between 3 to 10 minutes.

This gives the price enough time to move freely without the restriction of time – the price might sometimes breach your entry point but eventually still end as predicted.

Trading Using the Two Black Gapping Continuation Pattern in Olymp Trade.

What is the essence of spotting a chart pattern which we cannot transform into profit?

The Two Black Gapping Continuation Pattern must have a way of being applied in trading to yield profits. That is exactly what we would like to establish here – how we can identify and trade the pattern like pros.

To trade this pattern, follow these simple steps.

1. Identify a Downtrend.
2. Identify the Two Black Gapping Continuation Patterns.
3. Confirm Downtrend Continuation.
4. Enter a Sell Position.
5. Adjust your Stop Loss.
6. Adjust your Take Profit.

1. Identifying a Downtrend.

The first is the simplest step of them all. Look at price action.

Does the price seem to be moving down? Do you see it forming lower highs and lower lows? Then you have your downtrend.

Why are we so concerned about a downtrend by the way?

Do you remember the definition of the Two Black Gapping Continuation Pattern?

We said that it is a bearish continuation pattern that occurs on a downtrend to signify the continuation of such a trend. That then means we should not look for the pattern unless we have a downtrend on our charts.

2. Identifying the Two Black Gapping Continuation Pattern.

Did you establish that the overall trend was downwards? Then you are looking for the Two Black Gapping Continuation Pattern at the right place.

We said that the pattern comprises two bearish candlesticks that are preceded by a Gap Down in price. The first candlestick of the pattern gaps to open lower than the preceding candlestick’s low price.

The second candlestick of the pattern opens lower than the opening price of the first and closes lower than the close price of the first.

Notably, the second candlestick of the pattern has its high price at a level below the high price of the first.

Those two bearish candlesticks which form the pattern can be any bearish candlestick except the Doji candlestick.

Have those conditions been met? Have you identified your Two Black Gapping Continuation Pattern? Now you are ready to proceed to the next step.

3. Confirming Downtrend Continuation.

When we said that the Two Black Gapping Continuation Pattern is a bearish continuation pattern, we did not say that that the trend must continue downwards. Variations do occur away from the expected norm – and even after the pattern, the price can reverse upwards immediately leaving you with nothing to claim.

That is why the confirmation of the continuation of a downtrend is a very important step that we cannot ignore.

But, how do we confirm if a trend is continuing?

By use of both price action and the volume indicator which we mentioned as a recommended tool to be used alongside this pattern.

You will consider the downtrend continuation confirmed if either or both of the following occur;

• The candlestick immediately after the second candlestick of the pattern is bearish and closes below the low price of that second candlestick of the pattern.
• The candlestick immediately after the second candlestick of the pattern is bearish and accompanied by an increase in volume as shown by the volume indicator you have used.

4. Entering a Sell Position.

Once you have confirmed the continuation of the trend, execute that Sell position. Only ensure that you have your stop loss and take profit set as explained below.

5. Adjusting your Stop Loss.

Having confirmed that the trend will actually continue downwards is not enough for you to lax and trade without a stop loss. Can I shock you? This pattern has a whole 32% probability of having a trend reversal upwards just after the pattern has occurred.

Now that you know this, place your stop loss just above the high price of the breakout candlestick – the candlestick immediately after the second candlestick of the pattern.

6. Adjusting your Take Profit.

There seems not to be a measured distance to which the price will move after the pattern occurs. For that matter, you need to employ a sound risk to reward ratio in adjusting this level in relation to the Stop Loss.

A risk to reward ratio of 1:3 or thereabout sounds enough. You know very well that if you set that Take Profit too low, it may never be activated and you may never gain from such a nice pattern. Therefore, be objective and employ a reasonable risk to reward ratio.

Conclusion 

This is one of those nice patterns to trade on the bearish trend. Just ensure that you follow everything on this post to be on the safe side.

If you wish, try trading this pattern on your demo account before going live.