Advance Block Candlestick Pattern
An Advance block candlestick pattern is a popular way to track market movement. They are beneficial in quickly finding and identifying various patterns and signals. One of these patterns is the Advanced Block Candlestick Pattern.
In this guide, we will learn to identify the advanced block candlestick pattern, its construction, and all the necessary information related to it.
Advance blocks are three candlestick patterns that are traditionally considered bearish reversal patterns. The pattern consists of three bullish candlesticks. It forms the top of the uptrend because it will change the bullish price trend into a bearish price trend. The pattern shows that price action will change from an uptrend to a downward trend. The advance block candlestick pattern depicts buyers’ momentum decreasing soon, and sellers will come into the market hence reducing the price.
How to Identify the Advance Block Pattern
In constructing the advance block pattern, three bullish candlesticks should form in a specific order on the chart. Here is the guide for finding advanced block candlestick patterns on the chart.
The first candlestick creates strong bullish energy. It shows the uptrend in price due to many buyers pushing the price.
The second candle is also bullish but has a small body with a longer wick/shadow. It opens within the previous candle’s range means the opening price is within the previous candle’s range. The closing price is above the last closing price.
It has the smallest body-to-wick/shadow ratio. It opens within the previous candle’s range. Moreover, it suggests a pause in the uptrend.
Each subsequent candle body is shorter than the previous one. And the upper shadow of the subsequent candles increases with each candle. The candlestick body always represents the momentum of buyers/sellers in the market. In contrast, the shadow of the candle represents an imbalance of buyers and sellers in the market. The advanced block pattern occurs very rarely years earlier.
However, with the introduction of algorithmic trading, this pattern has become more common, thus speculating the intraday counter swings. Even then, traders shouldn’t take signals of buying and selling from this pattern alone. Therefore, it is advisable not to use an advanced block pattern for day trading. Instead, it should be used as the confirmation along with other chart patterns and technical indicators.
A graphical representation of the advanced block candlestick pattern is given below:
Traditionally advanced block patterns are considered to represent bearish reversal patterns. However, some suspect that it is behaving like a bullish continuation pattern. The performance of any pattern varies significantly from market to market. Depending on the market, a pattern can be a positive or negative signal.
Trading Psychology behind Advance block pattern
The market has a bullish trend which means it is profusely positive. Most traders and investors believe the positive trend will continue, and the buying pressure will increase. As a result, the first candle of the block ahead becomes a long bullish candle. Nevertheless, as the trend has been going on for some time, more and more market participants are worried that a correction is imminent.
As a result, buying pressure is easing but remains bullish. When the market tries to rise, sellers are ready to step in and relieve the selling pressure that is holding the market up. This pushes the market down and creates a higher wick. It also makes way to sell long positions, but short positions are not yet open. Overall, this shows that the market is losing bullish strength and will likely drop soon.
How to Trade Advance Block Patterns?
The advance block pattern suggests that bulls are weakening. This pattern forms a support zone, and the trend reversal needs to be confirmed first. Hence, the market needs to close below the first line. If the price doesn’t break the low of the first candlestick, pattern occurrence should be treated as false.
Advanced block patterns offer a modest risk/reward ratio. This is why it should be used for technical analysis to confirm a bearish trend reversal and trade in the direction of the bearish trend on the lower timeframes.
The advance block pattern is dependent on the time frame, and the market traded. You may be tempted to dive headlong into the market to act on the pattern; it is not a wise move to make. Most block patterns need to be adjusted to gain the benefits they deserve. Moreover, it is advisable to backtest all your trading ideas and only trades candlestick patterns with a proper backtest. In this way, we work out where the real edge lies.
Well, the success rate of strategies and patterns like advanced blocks can vary greatly depending on the current volatility index. For example, some patterns work well only when volatility is high, while others work well when the market is calm. We can only say that advanced blocks work well in high or low-volatility settings if you know the market, but you might be tempted to assume that high volatility is advantageous.
This is because markets, like stocks, tend to return to their average values. That is, make an exaggerated movement in one direction and then retreat. If an advance block forms with high volatility, it indicates that the market has gone too high, and we can benefit from the market’s mean returning quality.
We strongly recommend backtesting before trading a candlestick pattern. This pattern is favored for stocks and indices only. Remember, the bullish trend will remain stronger in the market if the price doesn’t break the low of the 1st candle.