The more complex candlestick patterns aren’t seen as often as those formed over only one or two candles. But when they do occur, they can provide good trading opportunities.

One such three-candle pattern is the tasuki gap formation. A tasuki is a sort of sash worn to support a shirt sleeve, although no one seems to recall why the term is used for this particular candlestick pattern. However, it provides confirmation that the current trend isn’t quite finished yet, similar to the bullish and bearish side by side lines patterns.

The upside tasuki gap forms over three candles during an uptrend:

•    The first is an ascending (clear or white) candle that continues the uptrend;
•    Second is another ascending candle that gaps higher on opening; and
•    Last is a descending (red or black) candle that opens in the second day’s trading range and partially fills in the gap, but the bears can’t quite push the price low enough to fill it completely.

Below is an example of an upside tasuki gap on a partial chart:

The price is trending upward when a gap forms between two ascending candles. Third is a descending candle that opens within the second day’s trading range and which pushes the price sufficiently lower to partially but not entirely fill in that gap. Although the price moves slightly lower over the next two days of bearish trading, the first candle’s opening price is never in jeopardy and the uptrend resumes on the sixth day.

The downside tasuki gap is the opposite. It forms over three candles during a downtrend:
•    First is a descending candle that continues the downtrend;
•    Next, another descending candle gaps down on opening and closes even lower; and
•    Finally, an ascending candle opens in the second day’s trading range and drives the price action high enough to partially fill in that gap, but the bulls can’t quite regain control.

Below is an example of a downside tasuki gap:

The price is trending lower when a gap opens between two descending candles. Third is a long ascending candle that opens within the second day’s trading range and partially closes the gap. It’s also an engulfing (outside day) pattern, which would normally be seen as an indication of reversal for the downtrend. However, the tasuki gap trumps the engulfing pattern in this instance, and the downtrend resumes the next trading day.

When trading tasuki gaps, the significant technical level is the first day’s opening price. Should the price action fall lower (or rise higher, for downside tasuki gaps) than the first candle’s open, that invalidates the trend continuation signal, making that an appropriate place for short-term traders to place their stop loss order.

Popularity: 10% [?]