Last updated on August 16th, 2020
The advance block is a three bar pattern that is usually taken as a bearish reversal signal. The pattern appears as a block of three white, rising candlesticks, each with a shorter body than the last.
The openings and closing levels of the candles are more important than the actual size.
It’s not strictly necessary that the candles are each smaller in size than the previous.
It is more important that the last candle be smaller than the first candle. And the pattern should display higher opens and higher closes.
The advance block is a fairly common pattern and can appear in any markets, and timeframes.
The assumption underlying the advance block is that it is a signal of weakening short term momentum.
However, the context of the pattern within an overall trend is crucial to its interpretation and how it should be traded.
Depending on the market and the timeframe, an advance block is sometimes a better indicator of a bullish continuation. This is the case for example in a strong uptrend.
For example, the pattern can appear in the late stages of a bullish run, as the rally stalls and sets up for a brief pullback. In this case, the trader should to look for other confirmations of trend exhaustion before going short.
Advance blocks frequently appear in brief upswings that take place in broader downtrends. These are bear market rallies, and in these situations the patterns may be more reliably traded as bearish reversals.
In a typical example, the advance block appears in an upwards price leg. This can be part of an overall uptrend, a downtrend or in a sideward trending market as shown in the example below.
The pattern denotes weakening buying strength because on each day bulls are having less impact on price.
In an uptrend, the advance block may be followed by one or two black candles or a consolidation, and then followed by an upwards continuation of the bullish trend. Examples of this are shown in the chart below.
In a strongly trending market, the pattern is therefore more likely to signal a brief pause, or short pullback rather than a major reversal.
Another example is the ranging market. Here the advance block can appear in short term upswings as a swing nears exhaustion and reverses back into the range. An example of this is illustrated in the chart above.
Performance of the advance block
The pattern was tested on the EURUSD daily chart over a 12 year period. The test looked at the next 15 bars after each signal to determine if the market moved up or down. The results are given in the table below.
|True bearish positives||33.33%|
|False bearish positives||66.66%|
Only 33% of cases resulted in a downwards movement following a confirmed pattern, the remaining 66% were followed by a bullish continuation. The average profit, after the 15 bar period was minus 0.74%.
In this example the advance block would have worked better as a sign of bullish continuation.
|True bearish positives||45.00%|
|False bearish positives||55.00%|
The results for GBPUSD were broadly the same. 45% of cases were correct; the remaining 55% were false positives where the price actually went up rather than down.
The results for stocks and cryptocurrencies were comparable to forex, with a few exceptions.
|Intel (INTC) Daily|
|True bearish positives||39.39%|
|False bearish positives||60.61%|
The tests traded all cases the same and didn’t distinguish between uptrends and downtrends. Most likely, better performance can be achieved by applying different rules pertinent to the trend.
From the above, it appears, at least based on historical data, that the advance block is a more reliable indicator of a bullish continuation than a bearish reversal.
These patterns often see short term corrections, but as the charts above show, this is typically only one or two bars before the main trend resumes. In many cases there were no reversal bars at all.
Advance blocks are therefore better seen as a “breather” in an uptrend than a sign of imminent reversal.
When trading these patterns it’s important to look at the surrounding context. Going short in an uptrend can be risky, especially if there are no other confirmations of a bearish reversal.