Downside Tasuki Gap Explained & Backtested (2024)

The downside tasuki gap is a three-bar bearish continuation Japanese candlestick pattern that is best traded using a bullish mean reversion strategy in the stock and forex markets according to backtests spanning multiple decades across multiple markets.

Data-driven traders should avoid this pattern in the crypto market as there’s not enough trade on the daily timeframe to determine a statistically significant result.

If you’re a candlestick technical analyst, you might be shocked to learn that history doesn’t support the bearish bias. The data shows you should capitalize on future volatility instead of a downtrend continuation.

If learning what history says about the best downside tasuki gap trading strategy excites you, keep reading.

What Is a Downside Tasuki Gap Candlestick Pattern?

The downside tasuki gap is a three-bar candle pattern that supposedly signals a bearish continuation.

The name comes from how the last candle looks like a tasuki (襷/たすき), which is a fashion accessory to hold up the long sleeves of the Japanese kimono.

The name might be fitting, but the traditional trading strategy is not. But before we discuss how best to trade this fancy pattern, let’s learn how to identify it on our candlestick charts.

How to Identify the Downside Tasuki Gap Candlestick Pattern

The following are the requirements for a valid downside tasuki gap candlestick pattern:

• A first candle.
• The second candle must be bearish and gap down.
• The third candle must be bullish, open within the prior candle’s real body, and close within the gap.
• The downside tasuki gap must occur during a downtrend.

We see the downside tasuki gap candlestick pattern on the Apple (AAPL) July 16th, 2008 daily chart.

Price is in a bearish trend as it’s below the fifty-day moving average. The first candlestick is bearish. The second candlestick is bearish and gaps down. The third candle opens within the second candle’s real body and closes within the window, fulfilling our downside tasuki gap pattern requirements. 

Now that we know how to identify this fashionable pattern on our candlestick charts, how do we profit from this three-bar pattern?

How to Trade the Downside Tasuki Gap Pattern

The downside tasuki gap should be traded using a bullish mean reversion trade strategy in the stock and forex markets and not traded due to lack of data in the crypto markets according to our 21-year backtest.

But before we learn the best tasuki trading strategy, let’s know how conventional traders lose money on this pattern.

Downside Tasuki Gap Bearish Continuation Trade Setup

Let’s commit this pattern to memory by practicing identifying the tasuki gap.

The pattern’s last candle is below the fifty-day moving average, giving us a clear downtrend. We have a red candle followed by another red candle that gaped lower, followed by a bullish candle that opened within the prior candle’s real body and closed within the gap window.

With the pattern identified, traditional traders short at a break of the third candle’s low and set a stop loss above the first candle’s high.

And while any trader who took the trade made profits, they’re likely to lose money over time, according to history. Instead, let’s look in the other direction.

Tasuki Gap Bullish Mean Reversion Trade Setup

With the pattern identified, data-driven stock and forex traders wait for the price to cross below and the pattern’s low and enter long when the price moves back above that low, setting a stop loss of one ATR.

Let’s make this lucid using the Markel (MKL) October 29th, 2020, daily chart.

The pattern low occurs on the third candle at $923. The price crosses below and back above that price the very next day, triggering an entry. This bullish pattern fattened this trader’s pocketbook.

Regarding profits, what does history tell us about the best downside tasuki gap trading strategies?

Does the Downside Tasuki Gap Candlestick Pattern Work? (Backtest Results)

Using the following rules, I backtested the downside tasuki gap 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

Multiple candlestick patterns are often confused with the downside tasuki gap pattern. It’s essential to understand the differences when using candlestick pattern technical analysis.

Upside Tasuki Gap vs. Downside Tasuki Gap

The upside tasuki gap is the bullish version of its bearish brother–they’re opposites. The upside tasuki occurs in an uptrend, and the pattern’s candle colors are reversed. The second candle gaps up and is white, and the third candle opens within the second candle’s real body and closes within the gap.

Down Gap Side-by-Side White Lines vs. Downside Tasuki Gap

The bearish side-by-side white lines is a three-bar bearish continuation pattern. The difference between the bearish side-by-side white lines and the downside tasuki gap is the second candle is white, and the third candle is roughly the same size as the previous. In contrast, the second candle is black and does not need to be of a similar size.

Downside Gap Three Method vs. Downside Tasuki Gap

The downside gap three methods is a three-candle bearish continuation pattern. There’s a bearish candle, a second bearish candle that gaps down, and a third bullish candle that opens within the previous real body and closes the gap.

The downside tasuki, as we just saw, doesn’t require a bullish or bearish first candle and closes within the gap.

The Bottom Line

The downside tasuki gap is a three-bar bearish continuation pattern that’s best traded using mean reversion strategies in the forex and stock markets. Traditional traders think this pattern continues the bearish trend, but data-driven traders know the pattern typically leads to volatility first.

If you’re interested in mastering Japanese techniques, read the ultimate guide to candlestick chart patterns.