Bearish Separating Lines Candlestick Pattern (Backtest)

Last Updated on January 11, 2023

The Bearish Separating Lines is a rare bearish continuation pattern. It starts with a relatively strong bullish candle, followed by a strong bearish candle, whose opening price is at the same level as the opening price of the previous bullish candlestick.

As a trader, it’s important to stay up-to-date on various candlestick patterns that can help you interpret the charts more accurately. One such pattern is the bearish separating lines, which signals a potential trend continuation. In this article, we’ll delve into the ins and outs of this pattern, including the psychology behind it and how you can trade it correctly whenever they appear on your charts.

What is Bearish Separating Lines pattern trading?

The Bearish Separating Lines is a candlestick pattern that consists of two candles. The first candlestick is a long bullish candle, which indicates that buyers were in control and prices rose significantly during the period.

Bearish separating lines

If we look at a chart, we have a couple of patterns below:

Bearish separating lines backtest

The second candlestick is a long bearish candle, which suggests that sellers took control and pushed prices down significantly. The two candlesticks should be approximately the same length and open at about the same price. Lastly, the second candle should open below the first candle’s opening and close below its low.

The Bearish Separating Lines pattern is seen as a bearish continuation pattern. Although, the first candle indicates that the downtrend is losing momentum and that the balance of power is shifting from sellers to buyers. This momentum is usually short-lived, and prices will ultimately trend lower in continuation of the downtrend.

Bearish Separating Lines Backtest

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The psychology behind the formation of the bearish separating lines pattern

The Bearish Separating Lines pattern is a continuation pattern only identified during a clear and defined downtrend when bears control and drive the price down. The first candle of the pattern signals that bulls are starting to gain momentum and push prices up.

However, this period is interrupted by the second candle, which means the bears are coming in and pushing the price back down. This shows that there are more bears in the market than bulls, and the market remains bearish.

The psychology behind this pattern is a reflection of the power of the sellers in the market that are pushing prices down in continuation of the sustained bearish trend.

What are the most reliable methods for determining entry and exit points when trading Bearish Separating Lines?

The most reliable method for determining the entry and exit points when trading the bearish separating lines pattern is straightforward.

Entry Point

The ideal entry point of your trade when using the bearish separating pattern is a sell order below the low of the second candle of the pattern.

Exit Point

As a good trader, before you enter any trade, you must have determined your risk-to-reward ratio based on your risk appetite, account type, and leverage.

For the bearish separating pattern, it is best to set your exit point a few pips below the low of the second candle. You can also check the market history to look for any significant market behavior, like order blocks, that can cause the market to reverse and adjust your exit point accordingly.

What are the risks associated with trading Bearish Separating Lines?

The risks associated with using the bearish separating lines pattern are the fundamental risks applicable to using all candlestick patterns. Some of them include the following;

  1. Too much reliant on this pattern can lead to overtrading and poor risk management.
  2. The bearish separating lines pattern can be unreliable and give false signals, particularly in choppy or ranging markets.
  3. This pattern is less efficient on lower timeframes.
  4. There is a tendency to interpret the bearish separating line pattern as a reversal pattern due to the first bullish candle in the pattern.
  5. The bearish separating lines is not a common pattern, but it is reliable if correctly identified. However, past performance does not guarantee future positive results, and the bearish separating lines pattern may not be effective in certain market conditions.

Lastly, it is essential as a trader to keep in mind that candlestick patterns are not a standalone trading system and should be used in conjunction with other trading strategies like the technical and fundamental analysis.

How effective is Bearish Separating Lines pattern trading in comparison to other trading strategies?

It is difficult to say definitively how effective the bearish separating lines pattern is, especially when compared to other trading strategies, because many variables are at play, and what works well for one trader may not work well for another.

And as mentioned earlier, the bearish separating line pattern is not common but can be very reliable if identified correctly. However, it is less effective than other bearish trend continuation patterns like the descending triangle, the bearish flag, the bearish pennant, and the bearish rectangle candlesticks patterns.

That being said, the bearish separating lines pattern can also be helpful to traders if used in conjunction with other technical and fundamental analyses.

As we always recommend on this website, you must backtest yourself to find out what works or not.

What are the benefits of using Bearish Separating Lines when trading?

One of the main benefits of the bearish separating lines pattern is that it is very straightforward to identify in real-time. And by identifying the pattern, traders can ride the downward momentum confidently to minimize their risk and maximize their profits.

In addition to identifying potential selling opportunities, the bearish separating lines pattern can be used in conjunction with other forms of technical and fundamental analysis to help confirm trade signals. This will allow traders to make more informed and successful trade decisions.

Lastly, this pattern can also be used by traders of all levels of experience, making it a useful candlestick pattern for both beginner and experienced traders. This means that traders can benefit from incorporating the bearish separating lines pattern into their trading strategy at any stage of their trading journey.

What indicators can be used with a Bearish Separating Lines pattern?

While many indicators are available to traders to help analyze market conditions, not all are useful for every candlestick pattern or trading strategy. However, some indicators can be effectively used in conjunction with the bearish separating lines pattern to confirm trade signals and increase the chances of success.

  • Moving Average: A moving average is a technical indicator that calculates the average price of an asset over a specific period. If the moving average is trending downward and a bearish separating line pattern is seen, it confirms that the market will likely continue to sell.
  • Relative Strength Index (RSI): The RSI is a momentum indicator that measures the magnitude of recent price changes to determine overbought or oversold conditions. If the RSI is oversold and a bearish separating line is spotted, it is advised not to sell the market as it suggests that the sellers are losing momentum and the market might reverse anytime soon.
  • On-Balance Volume (OBV): The OBV is a volume-based indicator that measures the net flow of volume into and out of an asset. When the OBV declines in a downtrend, it indicates a lack of selling interest and that the market will likely reverse.
  • Moving Average Convergence Divergence (MACD): The MACD is a trend-following momentum indicator that compares the difference between two moving averages. When the MACD is negative and declining, and a bearish separating line pattern is formed, the market will likely continue trending downwards.

It is essential to remember that these indicators and the bearish separating lines pattern should be used together as part of a larger trading strategy rather than solely relied upon, as they might not be effective in certain market conditions.

What is the most reliable way to backtest Bearish Separating Lines pattern trading?

Backtesting is the method of evaluating a trading strategy or model using historical data. It is a special trading model used to assess the viability of a trading strategy by finding out how it would have played out retrospectively using past data.

The concept behind backtesting is that strategies that have proven successful in the past are likely to continue producing positive results in the future. In contrast, those that have shown poor performance in the past are likely to continue underperforming.

The most reliable way to backtest the Bearish Separating Lines pattern is by checking the pattern efficiency in the past market’s charts in which the candlestick pattern is formed to see whether the outcome is positive or negative.

And to further ensure reliability, it is also essential to check its efficiency in different charts, including currency pairs, stocks, and indices.

For your convenience, we backtested all 75 candlestick patterns. Furthermore, we have put them all into Amibroker and Tradestation code.

How can one measure the performance of Bearish Separating Lines pattern trading?

There are several ways to measure the performance of a trading strategy. Some of these methods can also be used for the bearish separating lines pattern. Here are a few options:

  • Profit and Loss (P&L): This is perhaps the most apparent performance measure. By calculating the difference between the profits earned and losses incurred from trades using the bearish separating lines pattern, traders can get a sense of the strategy’s overall performance.
  • Risk-Adjusted Return: This measure takes into account the level of risk involved in the strategy. By dividing the return earned by the level of risk taken, traders can determine how efficient a strategy is.
  • Sharpe Ratio: This is a risk-adjusted measure that compares the strategy’s return to the volatility of the returns. A higher Sharpe ratio indicates a better risk-adjusted return.
  • Drawdown: This measures the peak-to-trough decline in the value of the strategy. By calculating the maximum drawdown, traders can get a sense of the worst-case scenario and the level of risk involved in the strategy.
  • Hit Rate: This measures the percentage of successful trades using the bearish separating lines pattern. A higher hit rate indicates a more effective strategy.

By combining these metrics, traders can get a comprehensive view of the performance of any trading strategy, including using the bearish separating lines candlestick pattern.

What are the best strategies for trading the Bearish Separating Lines?

In using the bearish separating lines candlestick to trade, the two most commonly used trading strategies are the Trend and breakout trading strategies.

The trend trading strategy involves entering a short position in a bearish trend that forms the bearish separating lines pattern, the stop loss is ideally placed just above the most recent swing high, and the take profit is set at a key support level.

In the breakout strategy, a short position is entered when the price breaks below the bearish separating line. The stop loss can be placed just above the line, and the profit target can also be set at a key support level.

How can one identify potential opportunities for trading Bearish Separating Lines?

To identify potential trading opportunities for this pattern, look out for it in a downtrend and wait for a confirmation candle before placing your trades. However, the pattern should be used together with other technical analysis tools.

What factors should be taken into consideration when trading Bearish Separating Lines?

The factors that traders should consider when trading the bearish separating lines pattern are;

  1. Trend: It is important to identify the overall direction of the market. The bearish separating line pattern is only valid in a downtrend.
  2. Volume: Traders should pay attention to the volume of the market. If the volume is high when the bearish separating lines pattern appears, it can strongly indicate a potential trend reversal.
  3. Market conditions: The bearish separating lines pattern is unreliable in a choppy or ranging market. The pattern should not be traded in such market conditions as its effectiveness is significantly lower at that period.

How can one use technical indicators to improve the efficacy of trading Bearish Separating Lines?

Knowing the right indicators to use will dramatically improve a trader’s chart reading skills, increasing the chances of taking good trade. However, using wrong indicators will also lead to inaccurate chart interpretation and bad trading decisions.

So, in trading the bearish separating lines pattern, the technical indicators like moving averages, RSI, OBV, and MACD discussed earlier should be mastered and used in conjunction with other trading strategies to increase the efficacy of trading the bearish separating lines candlestick formation.

What are the common mistakes to avoid when trading Bearish Separating Lines

If the bearish separating lines pattern is used improperly or incorrectly when trading, it can lead to disastrous results, such as bad entry points and mounting losses on your positions. Here are a few mistakes you should avoid when trading this pattern.

  • Don’t ignore trends: Identifying the market’s overall direction is essential before using the bearish separating lines pattern. If the trend is bullish, the pattern is not valid.
  • Not having a solid risk management plan: A solid risk management plan should be in place when trading the bearish separating lines pattern. This can include setting stop loss and take profit levels and not risking more than a predetermined percentage of the account balance on any single trade.
  • Don’t rely on the pattern alone: While the bearish separating lines pattern can be a powerful candlestick pattern, it should not be used in isolation. By using other technical indicators in conjunction with the pattern, traders can increase the reliability of their trade signals.

How can one adjust trading strategies when using Bearish Separating Lines?

To adjust your trading strategies when using the bearish separating pattern, you can utilize the tools available on your trading platform. For instance, you can use a trailing stop order to secure your profits as the market moves downward. Alternatively, you can adjust your stop loss value to the sell order value if you believe the market may reverse.

What is the optimal time frame for trading with Bearish Separating Lines?

The optimal time frame for trading with the bearish separating lines pattern will depend on the trader’s specific goals and risk tolerance. Shorter time frames, such as 15-minute or 1-hour charts, can offer more trade opportunities but may be more volatile and require more frequent monitoring.

On the other hand, longer time frames, such as daily or weekly charts, can provide a better overview of market trends, are less volatile, require less frequent monitoring, and offer fewer trade opportunities. Lastly, it has been suggested over the years that the bearish separating lines pattern works best in higher timeframes.

How important is risk management when trading Bearish Separating Lines?

Effective risk management is extremely important in trading any pattern, including the bearish separating lines, as trading carries inherent risks. As a trader, you must have plans to manage these risks to protect your capital and maximize your chances of success.

Risk managing techniques like setting stop-loss orders and using relative position sizing are crucial when trading the bearish separating line pattern. It is also essential for traders to clearly understand their trades’ potential risks and rewards and to only risk an amount of capital they are comfortable losing.

Other Frequently Asked Questions

  • Are there any risks associated with trading Bearish Separating Lines?

Yes, there are risks associated with trading the bearish separating lines.

  • How can one optimize the use of Bearish Separating Lines in trading?

Coupling the pattern with other technical and fundamental analysis is important to optimize the use of the bearish separating lines in trading.

  • What tools are used to analyze trends and identify trading opportunities with Bearish Separating Lines?

Tools like trend lines and line charts can be used to analyze trends and identify trading opportunities with the pattern.

  • How can one adjust trading strategies to account for changes in market conditions when trading Bearish Separating Lines?

When there are changes in market conditions, when using the bearish separating lines pattern, you can adjust your trading strategies by using tools like trailing stop to secure profits or breakeven the trade.

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