The advance block bearish reversal Japanese candlestick pattern loses $34.80, $2.50, and $21.50 in the crypto, forex, and stock markets, respectively, on average per $100 risked.
In other words, the data shows us that most traders will likely lose money in every market when trading this pattern.
But what if I told you that you could trounce traditional traders’ performance using a data-driven approach?
Would you be interested?
Keep reading to learn how to trade the advance block optimally.
What Is an Advance Block Candlestick Pattern?
An advance block is a three-bar bearish reversal pattern. It’s supposed to show the strength of the bulls is waning, and while it does to some extent, this pattern overwhelmingly tells us that volatility is incoming.
Let’s determine how to identify this pattern.
How to Identify the Advance Block Candlestick Pattern
The following are the requirements for a valid advanced block pattern:
- Three consecutive bullish candlesticks consecutively closing higher.
- Each opens within or near the real body of the previous candle.
- The first candlestick of the pattern should have a long body with no or a small upper wick.
- The second and third candlestick of the patterns have progressively smaller real white bodies potentially accompanied by longer upper shadows.
- The pattern must occur during an uptrend.
The Tesla (TSLA) daily chart on February 26th, 2018, shows an advance block chart pattern.
This reversal pattern’s first long bullish candlestick continues in the direction of the existing uptrend.
The bullish momentum reduces in the second candle and is visible by the candle’s smaller size. We can also see that the sellers pushed buyers back on day two with the longer upper wick.
The third green candle is smaller than the second showing further bullish momentum loss.
Now that we can spot the advance block in our candlestick charts let’s learn how to trade it optimally.
How to Trade the Advance Block Candlestick Pattern
Traders can trade the advanced block as a bearish reversal entering on a break of the third bar’s close in the stock and forex markets or as a mean reversion play in all markets.
Let’s look at how this pattern is traditionally traded and then cover how actually to trade it.
Advance Block Bearish Reversal Trade Setup
Apple’s (AAPL) daily chart shows the advance block pattern on November 20th, 2015. We see that price is in a bullish trend, as identified by the fifty-day moving average. The first candle is a relatively longer green bullish candle with no upper shadow. The second candle opens near the first candle’s body with an upper shadow. And the third candle opens near the real body of the second with a progressively smaller real body.
Traders traditionally trade this pattern by entering in at a break of the low of the third candle with a stop-loss set above the high of the same candle. With this bearish reversal signal, timing is everything.
By entering in at the break of the third bar’s close instead of the low, you can turn this pattern from a loser to a winner – but with this being said, it’s still optimal to trade this pattern using a mean reversion strategy.
Advance Block Bullish Mean Reversion Trade Setup
The above daily price chart of Tesla (TSLA) on February 26th, 2018, beautifully shows the advanced block pattern. We see that price is above the fifty-day moving average, constituting an uptrend. The first green bar is long with a tiny upper wick, with the second and third candles opening near each other’s real bodies getting consecutively smaller.
The bullish mean reversion setup waits for the price to break and reclaim the pattern low to go long with a stop loss of one ATR.
In our Tesla (TSLA) example, we see the price goes below the pattern low on March 1st, 2018, and crosses the low bullish on March 2nd, 2018 taking a profit on March 12th, 2018.
Does the Advance Block Candlestick Pattern Work? (Backtest Results)
Using the following rules, I backtested the advance block candlestick pattern on the daily timeframe in the crypto, forex, and stock markets.
- A close above the 50-day SMA constitutes an uptrend.
- I tested risk-reward ranges from 1 to 5.
- The optimal risk-reward ratio is selected using profit per bar.
- Entry and exits as discussed in the trading section above.
- Confirmation must occur within three days of the pattern signal.
Advance Block Bearish Reversal Backtest Results
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | advance block | advance block | advance block |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 3 | 3 | 3 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bearish reversal | bearish reversal | bearish reversal |
| stop_bar_type | high | high | high |
| entry_bar_type | low | low | low |
| risk_reward | 2 | 5 | 5 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 395 | 1351 | 6951 |
| pattern_tickers | 178 | 1072 | 4086 |
| patterns | 1127 | 20382 | 62007 |
| trades | 666 | 10329 | 37069 |
| confirm_perc | 0.59 | 0.51 | 0.6 |
| wins | 144 | 1687 | 4859 |
| losses | 522 | 8642 | 32210 |
| win_perc | 0.216 | 0.163 | 0.131 |
| avg_win_bars | 16.88 | 22.32 | 22.29 |
| avg_loss_bars | 5.85 | 8.91 | 6.75 |
| cons_wins | 4 | 18 | 8 |
| cons_losses | 11 | 48 | 27 |
| edge | -0.348 | -0.025 | -0.215 |
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | advance block | advance block | advance block |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 3 | 3 | 3 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bearish reversal | bearish reversal | bearish reversal |
| stop_bar_type | high | high | high |
| entry_bar_type | close | close | close |
| risk_reward | 5 | 5 | 5 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 395 | 1351 | 6951 |
| pattern_tickers | 178 | 1072 | 4086 |
| patterns | 1117 | 20512 | 62045 |
| trades | 1069 | 19001 | 57459 |
| confirm_perc | 0.96 | 0.93 | 0.93 |
| wins | 188 | 5170 | 12416 |
| losses | 881 | 13831 | 45043 |
| win_perc | 0.176 | 0.272 | 0.216 |
| avg_win_bars | 6.23 | 3.51 | 3.56 |
| avg_loss_bars | 4.96 | 2.28 | 1.57 |
| cons_wins | 5 | 24 | 15 |
| cons_losses | 24 | 35 | 26 |
| edge | 0.06 | 0.63 | 0.3 |
Advance Block Bullish Continuation Backtest Results
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | advance block | advance block | advance block |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 3 | 3 | 3 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bullish continuation | bullish continuation | bullish continuation |
| stop_bar_type | low | low | low |
| entry_bar_type | high | high | high |
| risk_reward | 5 | 5 | 5 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 395 | 1351 | 6951 |
| pattern_tickers | 178 | 1072 | 4086 |
| patterns | 1089 | 19133 | 58713 |
| trades | 720 | 11798 | 42987 |
| confirm_perc | 0.66 | 0.62 | 0.73 |
| wins | 170 | 1887 | 7541 |
| losses | 550 | 9911 | 35446 |
| win_perc | 0.236 | 0.16 | 0.175 |
| avg_win_bars | 13.96 | 29.27 | 18.36 |
| avg_loss_bars | 6.1 | 8.22 | 5.67 |
| cons_wins | 2 | 6 | 4 |
| cons_losses | 8 | 30 | 27 |
| edge | 0.42 | -0.04 | 0.055 |
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | advance block | advance block | advance block |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 3 | 3 | 3 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bullish continuation | bullish continuation | bullish continuation |
| stop_bar_type | low | low | low |
| entry_bar_type | close | close | close |
| risk_reward | 5 | 5 | 5 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 395 | 1351 | 6951 |
| pattern_tickers | 178 | 1072 | 4086 |
| patterns | 1098 | 19203 | 58835 |
| trades | 1039 | 16859 | 53954 |
| confirm_perc | 0.95 | 0.88 | 0.92 |
| wins | 250 | 2775 | 10580 |
| losses | 789 | 14084 | 43374 |
| win_perc | 0.241 | 0.165 | 0.196 |
| avg_win_bars | 8.39 | 16.42 | 9.38 |
| avg_loss_bars | 3.04 | 5.35 | 3.35 |
| cons_wins | 3 | 6 | 6 |
| cons_losses | 12 | 45 | 29 |
| edge | 0.445 | -0.015 | 0.18 |
Advance Block Mean Reversion Backtest Results
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | advance block | advance block | advance block |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 3 | 3 | 3 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bearish mean reversion | bearish mean reversion | bearish mean reversion |
| stop_bar_type | atr | atr | atr |
| entry_bar_type | pattern_high | pattern_high | pattern_high |
| risk_reward | 1 | 1 | 1 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 395 | 1351 | 6951 |
| pattern_tickers | 178 | 1072 | 4086 |
| patterns | 1164 | 20497 | 62089 |
| trades | 620 | 10186 | 36614 |
| confirm_perc | 0.53 | 0.5 | 0.59 |
| wins | 322 | 6910 | 22123 |
| losses | 298 | 3276 | 14491 |
| win_perc | 0.519 | 0.678 | 0.604 |
| avg_win_bars | 1.61 | 3.0 | 2.06 |
| avg_loss_bars | 1.71 | 4.61 | 2.79 |
| cons_wins | 7 | 36 | 26 |
| cons_losses | 5 | 8 | 9 |
| edge | 0.039 | 0.358 | 0.204 |
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | advance block | advance block | advance block |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 3 | 3 | 3 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bullish mean reversion | bullish mean reversion | bullish mean reversion |
| stop_bar_type | atr | atr | atr |
| entry_bar_type | pattern_low | pattern_low | pattern_low |
| risk_reward | 1 | 1 | 1 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 395 | 1351 | 6951 |
| pattern_tickers | 178 | 1072 | 4086 |
| patterns | 1178 | 20934 | 63094 |
| trades | 157 | 1630 | 6613 |
| confirm_perc | 0.13 | 0.08 | 0.1 |
| wins | 109 | 1109 | 4621 |
| losses | 48 | 521 | 1992 |
| win_perc | 0.694 | 0.68 | 0.699 |
| avg_win_bars | 4.5 | 0.88 | 1.05 |
| avg_loss_bars | 2.58 | 1.45 | 1.9 |
| cons_wins | 4 | 9 | 8 |
| cons_losses | 2 | 4 | 4 |
| edge | 0.384 | 0.36 | 0.399 |
The Bottom Line
While the advanced block pattern is commonly thought of as a bearish reversal, which has worked profitably if you enter in at the close of the last pattern bar, the data tell us that it works much better as a mean reversion play.
