Down Gap Side-By-Side Pattern: Candlestick patterns are the key technical tool for traders to understand price movements. The patterns formed on candlestick charts over a given time frame offer potential views on trend reversals, continuations, or indecision present in the market.

In this article, we will delve into the Down Gap Side By Side candlestick pattern, exploring its meaning, characteristics, and strategies with the example of charts.

Down Gap Side-By-Side Pattern – Definition

The Down Gap Side-by-Side pattern is a rare, three-candlestick formation that appears during a downtrend. 

This pattern is considered a bearish trend continuation pattern, suggesting that the downtrend will likely continue after the pattern has completed. Traders with existing short positions may want to hold or add to their positions, and traders who missed earlier opportunities can use this pattern to enter the market on the short side

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Down Gap Side-By-Side Pattern

Down Gap Side-By-Side Pattern – Formation

The Down Gap Side-by-Side pattern is a bearish continuation pattern that can appear during a downtrend. It consists of the following candles:

  1. A large red candle is a part of the existing downtrend.
  2. The second candle opens at a Gap-down below the close of the first candle
  3. The third candle opens gap up but manages to close lower than first candle.

This pattern suggests that the sellers anticipate further downward movement in the price and selling continues in the security

Down Gap Side-By-Side Pattern – Psychology

In a downtrend, the first candle formed is red, indicating that sellers are in control of the market. The second candle opens with a downward gap due to high selling pressure, as sellers are willing to sell the security at lower prices. The selling pressure is so high that the second candle opens with a gap down. The third red candle after a gap up suggests that the bulls tried entering the security but were overpowered by the bears.

The formation of the down gap side-by-side pattern forms a negative outlook, and more sellers might see this as a potential selling zone. Consequently, the price generally moves lower after the formation of the Down Gap side-by-side pattern due to the high selling pressure.

Down Gap Side-By-Side Pattern – Trading Ideas

Down Gap Side-By-Side Pattern

Before the appearance of this pattern, traders should ensure that the previous trend must be a downtrend. Once this pattern is formed, the following are the trade details- 

  • Entry- After the formation of the candlestick pattern, traders can take a short position at or just below the close price of the third candle.
  • Profit Target- Traders can exit the trade when the price of the security reaches near the immediate support zone. Once this level is reached, partial profits can be booked in the trade and the remaining position can be held until the next support level.
  • Stop loss- The stop-loss should be placed above the high of the second and third red candles.

Down Gap Side-By-Side Pattern – Example

In the above one-day chart of Nifty 50 Index, we can observe the formation of the down gap side-by-side candlestick pattern in a downtrend. As discussed in the article, the price of the security saw a bearish movement after the formation of this pattern. We can see that the bearish trend continued and hence, traders could have looked to enter a short position after the formation of this pattern.

At the time of the formation of this pattern, a trader could have taken a short position when the price of the security started trading below Rs. 11331.05 and the stop loss was at Rs. 11398.15.

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Key Characteristics of Down Gap Side-By-Side Pattern 

  1. Formation: This pattern consists of three consecutive bearish(red) candlesticks. The second candlestick opens below the close of the first candlestick, creating a gap between the first two candles and the third candle is similar in size to that of the second candle.
  2. Price Action: The opening price of the second candlestick should be lower than the low of the first candlestick, forming a downward gap.
  3. Volume: Ideally, there should be strong volume accompanying the pattern, suggesting conviction among traders.
  4. Continuation Signal: The Down Gap Side-by-Side pattern suggests that the bearish trend is likely to continue, as it demonstrates that sellers are still in control.
  5. Confirmation: The third bearish candlestick acts as a confirmation of the continuation of the downtrend. 

Conclusion

The Down Gap Side by Side pattern is a key candlestick for traders to identify a potential bearish continuation in security. Understanding its formation, meaning, and trading setup helps traders to make informed trading decisions.

Traders should always confirm the pattern formation in conjunction with other technical tools to avoid false signals. Also, having proper risk management with good risk-reward ratios and practice makes a trader profitable in the long run. 

Written by Deepak

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