This article is about two similar and behaviorally opposite candlestick patterns. Both the patterns consist of three consecutive candlesticks. And both indicate potential reversals. Both these candlestick patterns belong to the reversal candlestick pattern family.
In candlestick charts interpretation of the chart is the most important part for a trader. The importance increases when we talk about combination patterns.
Read More: Candlestick Patterns for Beginners
The three white soldiers candlestick pattern is a bullish reversal pattern but the three black crows pattern exclusively indicates a potential bearish reversal. We have included the two in one article for their structural similarities.
Three White Soldiers Candlestick Pattern
The three white soldiers candlestick patterns are bullish candlestick patterns. This pattern is indicative of price reversal. The three white soldiers candlestick pattern is used to predict the reversal of the current downtrend.
What are Three White Soldiers?
Three white soldiers are three consecutive green candlesticks or a bullish candlestick pattern. As shown in the figure below, all the green candlesticks have small wicks and shadows. They are placed in such a way that each green candle shows a higher closing price than the previous one.
In this pattern, ideally, each candle should open inside the body of the previous candle. All candles should have large bodies and should not have long wick or shadow.
What do the three white candlestick patterns tell you?
This pattern is quite a conclusive candlestick pattern. It alerts us about an imminent price reversal of the current downtrend. The three white soldiers candlesticks are seen at the end of a bearish trend. Consecutive three bullish candles represent the start of a bullish trend. Traders who trade using candlestick patterns can identify this pattern easily as these can be clearly identified in the chart.
Whenever these patterns are seen, traders are alerted about the bullish price reversal. The trader doesn’t trade the candles but gets confirmation from other trend reversal oscillators and then takes position.
Interpretation of three white soldiers patterns
The three white soldiers pattern consists of three bullish candles. These three green candles have some special features. Ideally, all the candles have large bodies. It happens when each candle covers a large operating range, The difference between the closing and opening price is comparatively big.
The three candles are approximately the same size. And all the candlesticks have small upper wicks and lower shadows.
The second and the last candle shouldn’t go beyond the mid-range of the previous candle. Also, the opening price of each candle should be within the body of the previous candle.
The closing price of the second candle should go beyond the high of the first candle. Similarly, the closing price of the third candle surpasses the high of the second candle.
The typical nature of this pattern can be visually identified without any hassle. The three bullish candles appear to be moving in one direction without being perturbed. This indication signifies that the bulls are in control.
The three white soldiers indicate that the prevailing bearish trend is about to reverse. The bullish trend is about to start. For consecutive three periods, we have seen that the candles are closing near the high of the periods. This is a sure sign of a bullish trend. But the consecutive greenish pattern does not tell the trader where to start. Hence for trader purposes, a trader needs to get confirmation from other indicators.
Identifying the three white soldiers pattern
A trader must know that all the three white soldiers patterns are not tradeable. The context is also important. A reader may incorporate a three-step process into the trading system before trading this pattern.
This candlestick pattern needs to develop at the end of a ber market or a bearish trend. Also, the three white soldiers pattern should develop near a key support level to be a valid trading area.
The three candles should have large bodies.
The trading volume must be higher when these three green candles are seen.
How to trade with three white soldiers patterns?
This pattern can be used as a long trade entry point. Also, traders who have been riding the bear wave may use this pattern for their trade exit. After this pattern, the market should go up beyond the high of the third candle. This situation is ideal for a long trade.
However, after a few bullish candles, the stock may reach the overbought zone and need to pause. This situation creates a pullback. Traders can also enter during this pullback after getting confirmation from other technical indicators like MACD, Stochastic, RSI, EMA etc.
Three white soldiers pattern in a real market context
We can see a chart below. Here the three white soldiers pattern can be seen developing at the end of a long bear trend. This pattern defies the prevailing downtrend and starts a price reversal pattern.
It can also be seen that when the first green candle developed, the stochastic indicator also gives an oversold reading. This happens at the end of the long bear trend. It signifies that the bears are exhausted. When the pattern developed, bears can see it and exit from their sell position. The chart shows actually what happens when traders see this pattern at the end of a bull run. The entry is made just after the high of the third candle. The stop loss is the low of first candle.
But for a trade, the trader should also look at key support resistance and volume buildup.
Risk management
Traders must be aware of the risks involved. The pattern may no validate at the end. Therefore traders should be aware of the big stop loss. A 1:2 risk/ reward ratio favours the trader in this kind of trading.
Position sizing is important. About position sizing the trader should look in our article about Kelly criterion. The trading or investment amount should be well within your acceptance limit. The risk amount may not exceed 2% of your capital as a general rule. When taking high risk trades, a trader must know about risk management and position sizing.
Limitations
Trading a white soldier pattern may seem difficult because of the risk involved. Here the entry is made at a high price opposite to the prevailing bearish trend. To many traders that may seem risk. If one tries to enter during pullback, the trader must be certain about the validity of pullback because no one wants to catch a falling knife.
Secondly the stop loss is big, therefore trader needs to be patient and smart about when to exit. A 1:2 risk/ reward may not be possible everytime. Due to a potentially less risk/ reward trade, many traders do not want to go for reversal trades.
A trader must also seek confirmation of trade from other indicators like Stocastic etc. and check for rising volume data.
Three Black Crows Candlestick Pattern
The three black crows candlestick pattern is just the opposite of white soldiers pattern discussed above. This is also a pattern of the reversal candlestick pattern family. The three black crows can be identified by the consecutive bearish candles.
From the diagram, it can be clearly seen this pattern develops at the end of a bullish trend. This is a bearish reversal pattern. After this pattern is formed a new bearish trend starts. From the name itself, we can understand that the three black crows mean three bearish candles formed one below the other.
Interpretation of three black crows pattern
Similar to the white soldiers, the three black crows candlestick pattern has three bearish candles. Let’s see how they appear to us.
First candle
The first candle is a red or bearish candle formed at the top of the prevailing bullish uptrend. It is almost a part of the uptrend from which the reversal occurs. It is a large-bodied candle that opened higher but closed far below.
Second candle
The second candle opens within the body of the first candle and closes below.it may or may not have large body.
Third candle
The third candle can also have a short or a long body. It also opens within the body of the second candle and closes below.
All three candles are bearish candles formed at the end of a bullish trend. It indicates a bearish reversal from the bullish trend.
One should note that any or all of these three candles can be bearish Marubozu candles.
How to trade the three black crows candlestick pattern?
Similar to white soldiers, the three black crows candlestick pattern needs confirmation before trading. A trader should also see whether the bearish candles are supported by rising volumes. The pattern must form at the top of the prevailing uptrend. In addition, a confirmation from MACD, Stochastic, RSI, EMA etc. need to be taken before entering the trade.
After being confirmed about the price reversal, the trader should sell / short below the low of the third candle. Here in this chart below, we have put entry just below the body of the third candle.
The stop loss will be the high of the first candle. The trade exit should be at a 1:2 risk/ reward ratio or higher. Or the trader may exit at the next uptrend.
Three black crows limitations
Similar to the white soldiers pattern, three black crows pattern also has similar limitations. A trader needs to be mentally strong to wait for the big stop-loss to hit. Because unless the stop liss is breached decidedly, there is always a chance of pullback and making the trade valid.
In addition to risk management, position sizing is also very important. A trader must consult other oscillators or indicators for confirmation of trade.
Difference between Three White Soldiers & Three Black Crows
Though both of them are reversal patterns, the white soldiers form at the bottom of the bearish trend giving a bullish reversal combination. But the three black crows pattern forms at the top of a bullish trend and indicates a potential bearish reversal pattern.
Bottomline
Though these two are opposite reversal patterns, they have similar entry, stop-loss and risk involvement. An important factor for both these combinations is support from uprising volumes. Unless supported by volume, it is hard for these reversal patterns to sustain.
Therefore even after taking confirmation from other indicators, both the bullish reversal and bearish reversal candles must be supported with volume. Then only the reversal patterns will be able to continue. Also, the trader needs to have patience for taking these reversal trades. But these easily identifiable reversal patterns give good profit if the market condition favours the trade.
FAQ
What is the Three candle rule?
The three candle rule says it need not be traded but used as an alert that the trend is nearing an end. Trading three candles may not be effective always.
What is the three white soldiers candlestick pattern?
The three white soldiers pattern consists of three consecutive bullish candles set in a higher-high pattern.
What is a white soldier candlestick?
The white soldier candlestick is the bullish candlestick formation.
How do you confirm three white soldiers?
As explained above three bullish consecutive candles, one higher than the previous pattern, are three white soldiers.
What does 3 bullish candles mean?
The three green candles are 3 bullish candles.
What do three black crows mean?
From the name itself, we can understand that the three black crows mean three bearish candles formed one below the other.
