Trading the Three White Soldiers and Three Black Crows

17 January 2022

    In this article we continue our journey of exploring candlestick patterns. Up to now we have presented the Doji candlestick, the Hammer and the Shooting Star. This time we will talk about the Three White Soldiers and the Three Black Crows. Looking back on our previous articles, in case you missed out on them, candlestick patterns are specific candlestick formations, often used to facilitate trading decisions and assist in properly reading the market. They display four pieces of information for a specific time period, in the form of a candle. The displayed information is the open, high, low and close price for the timeframe represented by the candle. The high and low points are connected with lines to the candle’s body, which is defined by the open and close prices, and usually candlesticks with a close price higher than the open price are colored in green, while candlesticks with a close price lower than the open price are colored in red. Candlestick patterns are common candlestick formations that often contain useful information for trading decisions.

     

    This time we will analyze the Three White Soldiers and Three Black Crows patterns. We will explain how you can identify them, what they mean and how they can be traded.

     

    What are the Three White Soldiers? 

    The Three White Soldiers pattern is a candlestick pattern that is usually found at the bottom of downtrends. When identified, it is used to signal a possible reversal of the price towards an upwards direction. The pattern consists of three consecutive long-bodied candlesticks that open within the previous candle's real body and a close that exceeds the previous candle's high. 

    Ideally, these candlesticks come with short shadows and long bodies, indicating that there is not much fluctuation in price and that the price is steadily moving up. Below you can see an example of three white soldiers spotted on a chart.

     

    Trading the Three White Soldiers

    The Three White Soldiers are usually found at the end of downtrends, and they form the beginning of a new uptrend. After the downtrend ends, three green bars with short wicks and big bodies are formed, signaling a potential reversal towards higher prices. The interpretation of the Three White Soldiers pattern in market terms is that buyers are gradually overwhelming the market and taking over sellers, which seem to have sold all their stock.

     

     

    The EURUSD Chart above demonstrates (inside the blue rectangle) an example of a Three White Soldiers setup being formed at the end of a bearish trend. Such a formation can in itself be considered a buy signal. However, we always look to increase our confidence in our signals, hence we can combine it with a relative strength indicator and check if RSI is above the threshold of 50, indicating a bullish, but not an overbought market state. In the case demonstrated above, the relative strength indicator has surpassed the value of 50, therefore we can consider this a good buying opportunity. The subsequent price action seems to confirm our assessment.

     

    What are the Three Black Crows? 

    On the other hand, the Three Black Crows are the mirror image of the Three White Soldiers. They are usually found at the end of uptrends and form the beginning of a new downtrend. In a similar manner to the Three White Soldiers, after the uptrend ends, three red bars with short wicks and big bodies are formed, signaling a possible reversal towards lower prices. This can be interpreted as: buyers have run out of steam and a sell-off may be approaching, thus you should consider entering a sell position. Below you can see an example of the Three Black Crows spotted on a chart.

     

     

    Trading the Three Black Crows

     

    An example of the Three Black Crows pattern is demonstrated in the above GBPUSD Chart. Here, the pattern is formed at the end of a bearish trend.In contrast to Three White Soldiers, this pattern formation can be considered a sell signal. But as mentioned above, for a more confident signal, we monitor the relative strength indicator and check if the RSI is below the threshold of 50, indicating a bearish, but not oversold market state. You can notice in the chart that the relative strength indicator has surpassed the value of 50, therefore we can consider this a good selling opportunity. This signal is also confirmed by the subsequent price action.

     

    In conclusion, the Three White Soldiers and the Three Black Crows are another type of candlestick patterns that allows you to assess the current marketplace and anticipate future price movements, assisting with wise trading decisions.

     

    Limitations of the Three White Soldiers and the Three Black Crows Patterns

    Candlestick patterns like the Three White Soldiers and the Three Black Crows can generate a lot of false signals that could lead to substantial losses if used out of context. Therefore, when using strategies based on candlestick patterns, always consider the market fundamentals that currently move the market and combine the signals with other confirmation signals, like oscillators, support/resistance levels and the relevant price action taking place on the chart. 


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