Bulkowski’s Bullish Separating Lines

Written and copyright © 2008-2010 by Thomas N. Bulkowski. All rights reserved.

In my book, Encyclopedia of Candlestick Charts, pictured on the right, I explore the entire range of candlestick patterns from abandoned babies to windows (not exactly A to Z, but you get the idea), in both bull and bear markets, using almost 5 million candle lines in the tests.

The book takes an in-depth look at 103 candlestick patterns and reports on behavior and rank (3 types: reversal rate, frequency, and overall performance), identification guidelines, performance statistics (tables of general statistics, height, and volume), trading tactics (tables of statistics on reversal rates and performance indicators), and wraps each chapter with a sample trade. I share a sliver of that information below. If you like what you read here, then you will love the book. Help support this website and buy a copy by clicking on the above link.

The bullish separating lines candlestick pattern acts as a bullish continuation of the upward price trend already underway. The trend after the breakout, based on the overall performance rank, is quite strong. In fact, a look at the numbers shows that the bullish separating lines do best after a downward breakout in a bear market -- or even a bull market for that matter. Upward breakouts are the weaklings and downward breakouts are the muscles group.

Important Results

Theoretical performance: Bullish continuation Tested performance: Bullish continuation 72% of the time Frequency rank: 76 Overall performance rank: 36 Best percentage meeting price target: 63% (bull market, up breakout) Best average move in 10 days: -8.05% (bear market, down breakout) Best 10-day performance rank: 4 (bear market, down breakout) All ranks are out of 103 candlestick patterns with the top performer ranking 1. "Best" means the highest rated of the four combinations of bull/bear market, up/down breakouts.

Bullish Separating Lines

Discussion

As the Important Results numbers show, and I alluded to in the introduction, the bullish separating lines candle pattern acts in theory as it does in reality, that of a bullish continuation 72% of the time. That ranks 6th of out 103 candles, which is very strong. The frequency rank is 76, so this candle pattern will not be easy to spot because it is rare. Out of over 4.7 million candle lines, I found just 2,842 of them. That may sound like a lot, and it is, but I would rather have 20,000 to study like many of the other patterns I looked at.

The overall performance rank is 36, but within that number the story gets interesting. The best average move 10 days after the breakout is a drop of 8.05% in a bear market. That ranks 4th where 1 is best out of 103 candles. The height of the candle pattern meets its target 63% of the time. In other words, compute the height from top to bottom of the two-day candle and add it to the top of the candle and that will give you a target price. The stock reaches the target almost two-thirds of the time in a bull market.

Identification Guidelines

Three Trading Tidbits

If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on. The pages refer to the book where the tips appear.

1. The breakout is upward most often -- page 656.
2. Select tall candles for the best performance (except for downward breakouts in bear markets)-- page 654-655.
3. Bullish separating lines within a third of the yearly high tend to act as continuations -- page 656-657.

Example

The bullish separating lines candlestick pattern appears circled in red on the daily scale. The upward price trend leading to the pattern is not a steep one as you might expect. The candle height throughout April is small so when the first black candle of the bullish separating lines candle comes along, it is a tall one (include the shadows). The next day, a tall white candle appears and the opening prices between the two candles are within a few pennies of each other. The candle pattern meets the criteria of a bullish separating lines pattern.

The breakout from this bullish separating lines candlestick is upward when price closes above the top of the candle pattern in June. The upward breakout says that this candle acted as a continuation of the upward price trend, just as theory suggested.

-- Thomas Bulkowski