Since candlesticks are the basic building block of most technical analysis, the ability to read the patterns they make is a valuable trading skill. Here, we’ll go over everything you need to know to make money with separating line candlestick patterns.
First though, let’s start with a definition.
What Is a Separating Lines Candlestick Pattern?
A separating lines pattern is a 2-candlestick formation that may signal a continuation. It consists of a large candle moving against the current trend followed by a large candle with the same open as the first candle that resumes the trend.
The separating lines candlestick pattern has both bearish and bullish versions. The open price of the candles forms a make-or-break price level that could shape upcoming price action.
Of course, candlestick patterns do not guarantee specific outcomes. Instead, they offer clues as to what is going on in the market.
So the question is, what do separating lines really tell you?
What Separating Lines Patterns Mean
Unlike some patterns, English speakers do not use the Japanese name for this one.
The term “separating lines” reflects the nature of the pattern, two candles with the same origin and diverging endpoints. While this does describe the pattern fairly well, it isn’t that memorable and doesn’t provide much insight.
In trading terms:
- During the first period, price drove strongly in the opposite direction of the trend.
- Before the second period began, price drove strongly in the direction of the trend and made its way back to the open of the prior period.
- During the second period, price drove strongly in the direction of the trend.
This sets the stage for continuation, as minds appear to be split but momentum is not.
How To Recognize Separating Lines Candlestick Patterns
Traders are attracted to patterns partly because they stand out.
However, it’s easy to see things on the charts that aren’t truly there (or anticipate events that never come to fruition). That’s the main reason you should wait for all candles to close before making decisions based on candlestick patterns.
In theory, a separating lines pattern must:
- Begin with a long candle moving against pre-existing trend.
- End with a long candle that 1) opens at the same price as the first, 2) moves with trend, 3) is approximately the same size as the first.
In practicality, many traders will make some exceptions.
- The first candle doesn’t necessarily have to be a long candle, as long as it is not a short line candle (ie. hammer).
- The first and second candles can be different lengths, as long as they are both long line candles and have the same open opening price.
- The second candle doesn’t have to open exactly in line with the open of the first candle, as long as it is in the same neighborhood.
Depending on who you ask, any of these standards may be more or less important. Technically, it would be more accurate to classify some of these variants as a different candlestick continuation pattern.
This is okay, as the implication means more than the classification. And similar patterns tend to have similar implications.
That’s not to say that these standards are altogether inconsequential (as we’ll elaborate on soon). You should definitely consider some non-negotiable, like the approximately even opens or the direction of the candles in relation to trend. Just keep in mind that context trumps criteria.
Ultimately, it’s up to you to decide how seriously to take each guideline.
After all, the goal of candlestick pattern analysis is to interpret underlying price action (not just label patterns correctly).
To this end, you need to understand where they fit.
Where Separating Lines Fit in the Chart Narrative
The markets are often characterized as a battle between the bulls and the bears.
Separating line patterns show that those trading against trend tried to take control on candle one, lost the impetus between candles one and two, then surrendered the momentum completely by the end of candle two.
On the chart, it looks like a short-lived ebb before the tide returns.
The first day saw a powerful counter-trend move, surprising both sides. Yet traders awoke the next morning feeling déjà vu as overnight trading brought the price back to the previous day’s open. This buoyed the confidence of trend-side traders, leading to a resumption of their dominance by the end of the second day.
Over the coming days, the “neckline” created by the two opens is likely to become a crucial decision zone. If those looking for continuation can defend this price level, they have a better chance at keeping the trend on their side.
(This is only a hypothetical illustration, as a separating lines pattern could represent a number of real-world scenarios.)
In the short-term, it amounts to a counterpunch answered by a haymaker.
The question traders need to ask themselves is,
“Will this lead to continuation or are there choppier waters on the horizon?”
To answer that question, you’ll need more than just an understanding of Japanese candlesticks and candlestick patterns. You’ll want to evaluate both within the context of longer-term chart patterns as well as trend and price levels. You’ll also want to make use of your own chart markup and indicators.
Explore the history of your preferred asset(s) with respect to separating lines patterns and apply your findings to your own trading style.
Now, you can test (and/or stretch) the criteria we mentioned earlier to identify the best trade setups. For instance, you may find that separating lines with larger candles play out more reliably than those with smaller candles. Or, you may find something else entirely.
This is the kind of technical analysis that brings the story in the charts into full focus.
How To Trade Separating Lines Patterns
Continuation points are great places to add to your position or adjust your stop loss.
Separating lines candlestick patterns serve as easy-to-spot signs of potential continuation and may even lead to the next big leg up or leg down. Generally, you can assign greater weight to multi-stick patterns than single candles because they give you more information over a longer duration.
However, there are a few things you should know about trading candlestick patterns.
First and foremost, their hit rates rarely exceed 70%. According to Bulkowski’s Encyclopedia of Candlestick Patterns, bullish separating lines have a 72% hit rate while bearish separating lines have a 63% hit rate. Although these numbers are pretty good compared to most candlestick patterns, they are far from a “sure thing.”
In addition, candlestick patterns do not have standardized price targets or measured moves like chart patterns do. This can make it difficult to decide when to exit your trade or how to manage your position.
Moreover, failed continuation patterns often lead to reversal or consolidation. Therefore, you need additional points of confirmation to increase your odds of success.
Some such factors include:
- Volume – For continuation, you typically want to see reduced trading volume against the trend. That means low volume on the first candle of a separating lines may be a good omen.
- Price Formations – Continuation patterns like the separating lines tend to perform better when there is thin support or resistance in their way. If it’s a blue sky breakout, even better.
- Matching Momentum – Oscillating indicators like the RSI or stochastics are commonly used to identify continuation by analyzing slope, percentile, and/or divergence.
The more corroborating elements are present, the more confident you can be about a separating lines continuation signal.
Even so, it would be difficult to form a successful trading strategy around any given candlestick pattern. There simply isn’t enough there to develop a strong edge. Even with a great understanding of trading math, order execution, market psychology, risk management, options, and automation, you’d still have a hard time.
In essence, separating lines patterns are more useful idea givers than trade makers.
Better yet, you’ll probably find more success building your strategy around other tools then using candlestick patterns as the final point of confirmation.
Other Candlestick Pattern Types
The separating lines is but one of many candlestick patterns.
And while learning them all is not a prerequisite for successful trading, you’d certainly benefit from getting familiar with other candlestick pattern types.
They can be categorized in several ways.
The most straightforward way may be by the number of candlesticks (ie. 2-candlestick, 3-candlestick, 5-candlestick, etc.)
More helpful though, you can group them by price direction or signal type. That is, they can be bullish or bearish and/or imply continuation or reversal. Finally, you can multiply these designations together to separate them into bullish continuation, bearish continuation, bullish reversal, and bearish reversal categories.
On the other hand, you might just tackle them in alphabetical order:
- Abandoned Baby
- Breakaway
- Counterattack Line
- Doji Star
- Engulfing
- Harami
- Harami Cross
- Hikkake
- In Neck
- Kicking
- Ladder
- Last Engulfing
- Long Day
- Mat Hold
- Matching
- Meeting Lines
- On Neck
- Star
- Stomach
- Tasuki Gap
- Three Inside
- Three Line Strike
- Three Methods
- Three Outside
- Tri-Star
- Tweezer
- Window
Sure, there are quite a few. But don’t let that intimidate you.
It’s unnecessary to memorize the name and criteria of every single pattern. The key is to learn the principles of price action and technical analysis.
In fact, you’re free to forget all of their names and specifications as long as you can look at a group of candlesticks and understand what they are trying to tell you. It’s just that the more of them you learn about, the easier this will become.
So take the time to study at least a few more of them.
Takeaways
To review:
Separating lines are a type of candlestick pattern that signal a potential continuation. While not a guarantee, their appearance may indicate that market conditions are likely to remain the same. Thus, they can help you find winning trades.
Of course, there are other candlestick patterns that you should learn about. And still, the ability to recognize patterns is not enough to trade successfully on its own.
Nonetheless, you’ve now added one more tool to your toolkit.
Have questions or more information to add? Contribute to the conversation in the comments below! Or, if you know someone who could benefit from this post, share it with them. You can also check out our Candlestick Patterns Guide to improve your candlestick analysis skills.