The Three White Soldiers pattern is a reversal pattern that occurs during an uptrend when bullish forces overpower bearish forces. In this article, we will discuss the Three White Soldiers candlestick pattern, how to identify and use it in trading, and its limitations. We will also compare it to the Three Black Crows pattern.
What is the meaning of Three White Soldiers?
In trading, accurate and timely predictions are crucial. Traders often seek to determine the direction in which prices will move. The Three White Soldiers candlestick pattern predicts a reversal from a downtrend to an uptrend.
The Three White Soldiers is a pattern consisting of multiple candlesticks that is used to analyze charts of various assets like stocks, currencies, and commodities. This pattern occurs after a prolonged downtrend, when bullish forces dominate for three consecutive days. Before discussing the significance of these candles, let’s understand how the pattern forms.
Formation of the Three White Soldiers candlestick pattern
The Three White Soldiers pattern forms at the bottom of a downtrend. As the name suggests, it consists of three green-colored candlesticks, indicating upward movement due to bullish pressure.
However, it is important to note that the opening points of the last candles are nearly equal to the highest point of the previous candle, and the closing point exceeds the previous candle’s high. These candles have long bodies, but their shadows should not be excessively long. The image below provides a clearer visualization:
Factors to consider when identifying the Three White Soldiers Candlestick Pattern
The Three White Soldiers candlestick pattern should not be considered in isolation. While the shape and size of the three candles suggest an uptrend, it is essential to check the following three requisites before taking any trading action:
- Market Scenario: The pattern is valid only if it appears at the end of a bearish trend. The Three White Soldiers should form at the end of a downtrend or near a significant support level.
- Candle Size: The size of the candles is crucial. A series of candles with minimal size may present a false scenario. Look for long bullish candles.
- Trade Volume: There should be an increase in trading volume to confirm the trend reversal. If the volume remains unchanged, it could be a bull trap that should be avoided.
What does the Three White Soldiers pattern indicate?
Now that you understand how to identify and confirm an uptrend reversal through the Three White Soldiers candlestick pattern, let’s discuss its implications. This pattern signifies a change in market sentiment, particularly regarding the price action of a stock, commodity, or currency pair.
Candlesticks on the chart should have minimal or no shadows, indicating that bullish forces are in control and prices are being maintained at the top for that specific session. This pattern should continue for three consecutive sessions or working days. It is also important to look for other candlestick patterns, such as the Doji, which indicates a potential reversal in price action.
Let’s consider an example using a currency chart of USD/INR. The chart below illustrates the formation of Three White Soldiers candlesticks after a downtrend, resulting in a reversal of the trend.
The Three White Soldiers pattern is often seen as a bullish pattern that traders can use as an entry or exit point. It can serve as an entry opportunity for traders looking to take a bullish position or as an exit signal for those who are short on the security.
Note! The Three White Soldiers pattern should be used in conjunction with other market indicators like the Relative Strength Index (RSI) to enhance its value.
Example of trading using the Three White Soldiers pattern
The pattern indicates a strong reversal in the bullish trend, allowing you to plan your entry or exit. If you are a short-term trader, consider exiting at this point. If you are looking for an entry point, consider opening a long position.
However, it is important to confirm the signal provided by the Three White Soldiers pattern. For instance, compare it with the Relative Strength Index (RSI). There may be a temporary overbought condition when the RSI crosses the 70 mark.
The pattern can also test market resistance during a bullish reversal. Overall, the market remains bullish, although short or intermediate consolidation stages are possible. It may also indicate that a stock is approaching a resistance level before an uptrend occurs.
Difference between Three White Soldiers and Three Black Crows
The Three Black Crows pattern is the opposite of the Three White Soldiers pattern. In the case of the Three Black Crows, three long-bodied candles form, but the closing price is lower than the previous candle, unlike the Three White Soldiers pattern where the closing price is higher than the previous candle.
Therefore, the Three Black Crows pattern indicates a bearish market sentiment. It suggests that bears are gaining control, signaling traders to exit their long positions. However, it is important to exercise caution with these patterns and confirm the trend reversal using adequate volume and other available trading tools.
Using Three White Soldiers: Limitations and Considerations
Relying solely on a single pattern like Three White Soldiers can be risky because it may indicate a temporary market shift rather than a deliberate price action. It’s important to recognize that the pattern could be a temporary consolidation period, leading to potential incorrect decisions based on a false picture.
Today, traders combine various technical analysis tools with the Three White Soldiers pattern to enhance its effectiveness. This is because no pattern is flawless. Let’s explore some limitations that require attention when trading with the Three White Soldiers candlestick pattern:
- Buying at a higher position: Your buy position is triggered only when the highest price of the pattern is broken. This means you are purchasing at a higher price and need to sell at an even higher price to generate profits.
- Placement of stop loss: Generally, the stop loss position is set below the low of the first candle, requiring a wider stop loss range. In this case, you have two options: either wait for a potential pullback (which may or may not occur), resulting in a missed opportunity, or keep the profit potential relatively small compared to the size of your stop loss. The latter option may not be worth the risk of opening a long position.
- Risk of reversal trading: Reversal trading carries a high risk of losing funds if the trade goes against your initial position.
To overcome these limitations, it is essential to use other technical indicators as additional clues. For example, the stochastic oscillator can confirm that the pattern is forming in the oversold area before considering a long position.
The bottom line
In conclusion, the Three White Soldiers Candlestick pattern is a powerful tool that should be included in your trading arsenal. It is visually easy to identify and provides crucial information about market sentiment, particularly in establishing bullish trend reversals. However, it is important to be cautious of misinterpreting the signal. To mitigate this risk, it is advisable to use the pattern in conjunction with other trading tools.