In Technical analysis, there are candlestick patterns that are rare to spot, and when spotted, they give a strong directional movement according to the type of the pattern, and one such pattern is the Bearish Stick Sandwich candlestick pattern. It is a powerful candlestick pattern signalling a strong bearish reversal in the ongoing trend.
In this article, we will begin by defining what a Bearish Stick Sandwich is, its structure, the psychology behind the pattern, how to trade it with an example of a trade scenario, its advantages, and its disadvantages.
What is the Bearish Stick Sandwich candlestick pattern?
The Bearish Stick Sandwich candlestick pattern signals a potential bearish reversal in an ongoing uptrend and signals a change in market momentum from bullish to bearish, using a three-candlestick formation.
The term “Sandwich” refers to the formation of the candlesticks.
- In the pattern, the first and third candlesticks are bullish and have the same or very similar closing prices.
- The second candlestick is bearish and positioned between the first and third candlesticks, forming the “filling” of the sandwich.
Structure
The Bearish Stick Sandwich is spotted at the top of the price chart.
- First Candlestick: A long bullish candlestick is formed, indicating the significant strength of the buyer to continue an uptrend.
- Second Candlestick: A bearish candlestick forms within or near the body of the first candlestick and closes lower, indicating sellers stepping in against the ongoing uptrend.
- Third Candlestick: A bullish candlestick forms that closes at or near the same price as the first candlestick and closes above the prior red candle, creating a resistance level, while its open is usually near or slightly below the close of the second candlestick.
Psychology Behind the Bearish Stick Sandwich Candlestick Pattern:
- Bullish Candlestick: The security is in an uptrend, as buyers are dominant, driving the price to its high, resulting in a strong bullish candlestick formed, indicating the continuation of the uptrend ahead.
- Bearish Candlestick: After continued buying pressure, sellers step in strongly with a candle that opens below the previous high and closes low, and then buyers step in to resist the sellers. At the same time, sellers take control over the candlestick, and it closes in a strong bearish candlestick
- Bullish candlestick followed by trend reversal: The third candlestick generally opens near or just below the previous candle’s close, showing buyers stepping in to challenge sellers. Buyers then push the price up, resulting in the third candlestick closing at or near the first candlestick’s close, signalling a potential reversal.
How to Trade the Bearish Stick Sandwich Pattern?
- Entry:
- Enter a short position in the security at the price above the high of the bearish stick sandwich candlestick pattern formed.
- Stop-loss:
- The stop loss for the long position can be placed at the low of the candlestick pattern formed.
- Target:
- The initial target is the next support line, or, based on your risk-reward ratio of 1:1, 1:2, or higher, respectively.
- In the price chart, if you spot any candlestick pattern formed signalling a bullish reversal, you can book partial profits or trail the stop-loss.
Example of trade scenario:
In the image below, you can look at the chart of “Ambuja Cements Ltd” stock at a 1-day timeframe from 3rd to 7th August 2023. You can spot the Bearish Stick Sandwich candlestick formed and signalling a sell, as it is a trend reversal.
What are the advantages of the Bearish Stick Sandwich candlestick pattern?
- The Bearish Stick Sandwich pattern is easy to identify the bearish reversal and trade for beginners.
- The Bearish Stick Sandwich pattern provides a good risk-reward ratio, as you will be trading a minimal stop-loss.
- The Bearish Stick Sandwich pattern is versatile across all timeframes and security trading markets, as a single strategy applies to all markets.
- The Bearish Stick Sandwich pattern is not spotted often, but it helps beginners control overtrading.
What are the disadvantages of the Bearish Stick Sandwich candlestick pattern?
- In a sideways market, the Bearish Stick Sandwich can indicate false signals reflected in low trading volume.
- The Bearish Stick Sandwich pattern signals the potential bearish reversal, but does not describe the strength of the upcoming downtrend.
- The Bearish Stick Sandwich pattern lacks confirmation within the pattern, making it dependent on the following candlesticks.
- The Bearish Stick Sandwich pattern can be spotted after the news, making it hard to confirm the trade, and it involves higher risk.
In Closing
In this article, we discussed the Bearish Stick Sandwich candlestick pattern, its structure, the psychology of the pattern, how to trade it, along with an example, and its advantages and disadvantages.
The Bearish Stick Sandwich candlestick is a powerful candlestick signalling the potential bearish trend reversal. At the same time, it offers limited opportunities for beginners with clear entry and exit signals. This makes it a relatively more reliable pattern to trade.
Your profitability depends on your approach to the trade, your risk management, and your mindset when you are holding the trade, as no indicator or tool is 100% accurate. As the Bearish Stick Sandwich candlestick pattern is combined with additional indicators or tools (RSI, MACD, or others), its efficiency and accuracy increase rapidly.
