At a time when many traders are scratching their heads trying to understand how stocks can rise during the biggest economic downturn in nearly a century, it is more important than ever to use candlestick patterns within your own day trading strategy to understand price action.
Candlestick patterns tell traders about price trends and the market sentiment.
They have the potential to be the best trading tools when used alongside other useful technical indicators, such as Pivot Points and Bollinger Bands.
Today, we are going to focus our attention on a candlesticks pattern called the three white soldiers, which typically occurs when a strong downtrend is reversing into a strong uptrend.
What is the Three White Soldiers Pattern?
The three white soldiers pattern is a bullish reversal pattern formed by three consecutive candles, which are green (or white) in color. This pattern forms at the bottom of a downtrend and all three candles are long and bullish.
It is often used as a reversal signal out of a bear market or a downtrend since that creates the best risk/reward ratio.
The candles are almost the same length and the open of each candle is above the open of the previous candle. It signals an upcoming uptrend because of the strong buying pressure.
This pattern is also known as “three advancing soldiers” because of the fact that it indicates the end of a downtrend and marks a clear indication in the balance shift from sellers to buyers.
The opposite of the three white soldiers is called the three black crows.
This pattern is represented by three consecutive red (or black) candles that form at the top of an uptrend. It forms when three bearish candles follow a strong uptrend, suggesting that a reversal is in the works.
While the three white soldiers indicate that the bears are ruling the day, the three black crows of the three black crows point to bearish movement.
What the Three White Soldiers Pattern Looks Like
The three white soldiers pattern looks like a staircase with each open above the open of the previous day and the next candlestick holding at least the middle price range of the previous day.
Each candlestick should also create a new higher high than the previous candle.
Here is a chart showing how the three white soldiers pattern looks like.
For the pattern to be considered valid;
- The second candlestick must bigger than the body of the previous candle.
- The second candlestick should close near its high, leaving a small or non-existent upper wick.
- The last candlestick should be at least the same size as the second candle and have a small or no shadow.
Why It Forms
As previously mentioned, the three white soldiers candlestick pattern is a reversal pattern that forms at the bottom of a downtrend.
During the bottom of a downtrend, traders anticipate a change in trend because of fundamental or psychological reasons.
They tend to buy the stocks and this buying activity forms the three white soldiers pattern. When this pattern forms in an uptrend, it indicates the stock trend will hit higher highs.
When trading for profit, you have to examine the pattern for evidence of buying and selling pressure and what the potential is for a reversal at that point in time.
This pattern is most likely to form where the market is reversing after a brief downswing.
It may also form after a period of consolidation, which is still a valid sign of a move higher, though it is not as desirable as it would be if it were found at the end of a prolonged downtrend.
Tips for Trading the Pattern
The three white soldiers pattern requires three data points across a timeframe to signal momentum and a high chance that the market will shift in an uptrend from a downtrend or rangebound if that was the price action behavior prior to this pattern.
There are several ways you can trade the pattern when you come across it. The first step you should do is confirm the signal using technical indicators such as the relative strength index (RSI) or the stochastic oscillator.
This can help to validate what the candles are signaling since indicators can provide more insight into price action.
For instance, if the three white soldiers patterns appears at the bottom of a downtrend and you think a reversal is coming, you can use the RSI to test the signal.
This indicator can help you to forecast price moves because it tracks the momentum and speed of the market. If a reversal is confirmed, you may want to open a long buy position.
The best place to enter your buy position is on any of the three soldiers. But it is best if you enter into trading position on the first soldier.
Three white soldiers pattern is a strong confirmation for any other bullish signals that the market has shifted to a bullish uptrend. The odds of this pattern working increases if the strong moves happen off oversold support.
However, the danger of it not working increases if the moves take a chart into an overbought reading.
Bottom Line
The three white soldiers is one of the many candlestick formations that are used by day traders to identify possible entries in the stock market.
As mentioned before, this pattern forms at the end of a downtrend and it is a clear indication of a shift in the balance from the sellers to the buyers.
Therefore, it can be useful in determining a price reversal following a downtrend.
If you are scanning the market every day for signs of upward movement, this pattern should be your best friend.
However, it is best utilized in combination with a confluence of other momentum signals like the MACD crossover, breakouts, or moving averages.