Bullish Separating Lines Explained & Backtested (2024)

The bullish separating lines is a Japanese candlestick pattern with mixed results when traded traditionally across all markets tested according to our decades-long backtests.

But what if I told you that you could turn this mediocre pattern into one of the most profitable patterns in existence?

Would that make you hungry for more?

If fattening your wallet gets you going, let’s learn how history tells us to trade the bullish separating lines.

What Is a Bullish Separating Lines Candlestick Pattern?

The bullish separating lines is a two-bar candlestick pattern. The candlestick pattern gets its name from the horizontal line that can be drawn through both candlestick’s opening prices.

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

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

How to Identify the Bullish Separating Lines Candlestick Pattern

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

• The first candle must be bearish.
• The second candle must be a bullish belt hold pattern.
• The opening price for the first and second candles must be similar.
• The bullish separating lines must occur in an uptrend.

We see this pattern on the Netflix (NFLX) September 29th, 2021, daily chart.

The price is in an uptrend as it’s above the 50-day moving average, which we’re using to determine a short-term bullish trend. The first candle is bearish with a small red real body. The second candle opens nearly the same as the first day and forms a bullish belt hold candle, fulfilling the pattern requirements.

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

How to Trade the Bullish Separating Line Pattern

According to our backtests, traders should use a bearish reversal trading strategy across all markets, expecting a longer-term move. 

But before we learn how to capitalize on the bullish separating lines pattern’s mean reversion properties, let’s review how most traders trade this pattern.

Bullish Separating Lines Bearish Continuation Trade Setup

Most technical analysts consider this as a bullish continuation pattern.

We see the pattern form on Apple’s daily chart above.

The price is above the 50-day moving average, which we’re using as a proxy for a current bullish trend.

The first candle is red, followed by a second candle that opens near the last candle’s opening and turns into a bullish belt hold.

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

We can see that the above trader made a significant chunk of change using the bullish continuation trading strategy. But is this sound trading advice?

According to history, you’ll likely break even at best in the stock market and lose significantly in the forex and crypto markets.

So what should you do?

I think you should listen to history and go in the opposite direction.

Bullish Separating Lines Bearish Reversal Trade Setup

Data-driven traders enter short when prices cross below the second candle’s close and set a stop loss above the first candle’s high.

Using the Alphabet (GOOG) November 18th, 2021, daily chart as an example, traders would enter short on the day after identifying the bullish separating lines at $150.71 and place their stop loss above $151.61.

We see that the bears reign and push prices lower, turning this into a profitable trader for the data-driven trader, depending upon the exact stop placement.

Speaking of profits, what does history tell us we can expect after seeing a bullish separating lines signal?

Does the Bullish Separating Lines Work? (Backtest Results)

Using the following rules, I backtested the bullish 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 bullish separating line candlesticks. It’s essential to understand the differences between these related patterns when using candlestick pattern technical analysis.

Bearish Separating Lines vs. Bullish Separating Lines

The bearish separating lines candlestick pattern is the same in opposite directions. 

The bearish versions require a downtrend with a bullish candle followed by a bearish 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 candle with similar openings.

Bullish Side-by-Side White Lines vs. Bullish Separating Lines

The bullish side-by-side white lines candlestick pattern is a three-bar bullish continuation pattern, whereas the bullish separating lines is a two-bar continuation.

The reason these two patterns are confused is in the name–they both reference lines and have a “line” requirement.

The bullish side-by-side has two consecutive candles with similar opens and closes, while the separating lines two candles have similar opens as we just saw.

Upside Gap Three Methods vs. Bullish Separating Lines

The upside gap three methods candlestick pattern is a three-bar pattern. The bullish separating lines and upside gap three methods often get confused because there’s a gap between the last two candles in the three methods forming somewhat of a line between the first candle’s close and the second candle’s opening. The similarities stop there, however.

The Bottom Line

The bullish separating lines is a two-bar bullish continuation candlestick pattern occurring at an average frequency that is best traded using a bearish reversal trading strategy across all markets tested.

Interested in data? I’ve ranked and reviewed all technical analysis candlestick patterns.