Bearish Separating Lines Explained & Backtested (2024)

The bearish separating lines is a two-bar bearish continuation Japanese candlestick pattern that suggests near-term bullish movement according to the data from an extensive backtest.

Traders practicing traditional charting techniques with the bearish separating lines break even in the stock market and lose money in the crypto and forex markets.

But before separating this candlestick pattern into the losers pile, what if I told you that it could be a consistent winner?

Would you be intrigued?

If this gets you going, let’s learn how to trade the bearish separating lines in a data-driven way.

What Is a Bearish Separating Lines Candlestick Pattern?

The bearish separating lines is a two-bar candlestick pattern.

The name comes from how the two candles form a line on a candlestick chart.

Most traders consider the bearish separating lines a continuation pattern, but historical data tells us otherwise.

But before we cover the backtest results, let’s learn how to identify the bearish separating lines on our candlestick charts.

How to Identify the Bearish Separating Lines Candlestick Pattern

The following are the requirements for a valid bearish separating lines pattern:

• The first candle must be bullish.
• The second candle must be a bearish belt hold candlestick.
• The second candle must open at the same price as the previous candle.
• The bearish separating lines must occur in a downtrend.

We see this pattern on the Trandsigm (TDG) April 13th, 2020, daily chart. Price is in a clear downtrend as it’s below the 50-day moving average, which we’re using as a proxy for a short-term bear market. The first candle is bullish with a small green real body. The second candle opens nearly the same as the first day and produces a bearish belt hold candle fulfilling the pattern requirements.

Now that we know how to identify these bearish separating lines patterns, let’s move on to trading them.

How to Trade the Bearish Separating Line Pattern

According to our backtests, traders should use a bullish mean reversion strategy in all markets tested.

But before we learn how to capitalize on the bearish separating lines pattern’s volatility, let’s analyze how most traders trade this pattern.

Bearish Separating Lines Bearish Continuation Trade Setup

The bearish separating lines are traditionally traded as a bearish continuation pattern.

We see that at the time of the bearish separating lines, the price is below the 50-day moving average, which we’re using as a proxy for a short-term bear market.

The first candle has a little green body, followed by a second candle that opens near the prior candle’s open and goes bearish in a big way forming a belt hold candle.

With the two candles identified, traders typically go short at a break of the low of the second candle and place their stop loss above the high of the first candle. 

Any trader who took the above trade likely made money in the short term but will lose money over an extended period.

So what should you do? Listen to the data, of course!

Bearish Separating Lines Bullish Mean Reversion Trade Setup

Data-driven stock and crypto traders enter long when the price returns above the pattern low with a stop loss of one ATR.

Let’s use the above American Airlines’ July 13th, 2021, daily chart to make this lucid. The pattern low occurs on day two at $19.99. This starts the pattern confirmation countdown. If the pattern doesn’t move below the low within three days, it doesn’t confirm, and we stop watching it. 

The price opens higher the day after the separating lines pattern identification but never crosses the pattern low. The same goes for the next day. The third day forms a bearish marubozu candle whose price does move below the pattern low of $19.99.

Now that price has crossed below the pattern low, we wait for the price to move back above that low to trigger an entry.

The next day’s candle gaps significantly lower, never moving back to our $19.99 target. The next day, there’s a sizeable bullish move, and the price rises above our $19.99 pattern low target triggering an entry and fattening our pocketbook. 

Speaking of pocketbooks, what can the bearish separating lines historical performance tell us?

Does the Bearish Separating Work? (Backtest Results)

Using the following rules, I backtested the bearish separating lines 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 are discussed in the how-to trade section above.
• Confirmation must occur within three days of the pattern signal.

Similar Candlestick Patterns

Many candlestick patterns look similar to the bearish separating line candlesticks. It’s essential to understand the differences between these related patterns when using candlestick pattern technical analysis.

Bullish Separating Lines vs. Bearish Separating Lines

The bullish separating lines candlestick pattern is the same, just in opposite directions. 

The bullish separating lines require an uptrend with a bearish candle followed by a bullish belt hold candle whose opening price is near the first candle’s opening price, whereas, as we’ve just seen, the bearish requires a downtrend with a bullish candle followed by a bearish belt hold with similar openings.

Oh, and I might add that they’re traded incorrectly as continuation patterns according to history.

On Neck vs. Bearish Separating Lines

The on neck candlestick pattern is a close cousin of the bearish separating lines. Both require a downtrend, and both are considered a continuation pattern.

The on neck requires that the first candle is a long black candle and that the second candle is a white candle that opens below the previous day’s low with a close equal to the last day’s low.

The Bottom Line

The bearish separating lines pattern is regarded as a bearish continuation pattern. Still, the data tell us that volatility is likely incoming and to trade it using a mean reversion strategy.

Check out the backtest results if you’re interested in learning candlestick patterns.