Three Black Crows Pattern in Candlestick Trading


Whether you’re just getting into trading financial instruments or you’ve been around in the trading game for a while, I am sure that you have heard of the term “three black crows.” It applies to analyzing candlestick charts and it’s just as ominous as it sounds. We’ve discussed various components of finance and investing, including the three black crows pattern in candlestick trading with close friends, and family alike. So to save you time, here’s an in-depth guide to the telltale sign of three black crows. 

Three black crows are a visual cue on candlestick trading charts that predicts an upcoming trend reversal. Using this pattern, by comparing the closing, opening, highs, and lows of security prices across the candle body, an investor can tell if the trading price for an asset is likely to reverse downward. 

No matter what financial instrument you trade – stock, forex, commodity, or cryptocurrency; it’s all a blend of math, patterns, experience, and to some extent gut instinct. And to make the most of any trading information you have to understand the finer details. Read on to get a solid understanding of the three black crows, candlestick trading, and more. 

IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!

How to identify Three Black Crows Pattern in Candlestick Trading?

The term three black crows is as accurate as it gets since this pattern is easy to spot to the trained eye. To show you what to look for we’ve broken it down into several parts that are described below.

Construction and Key Characteristic of a Three Black Crows Pattern

The three black crows each represent their own candlestick on the chart. Note that while the most accurate results occur over a span of 3 consecutive sessions this isn’t an absolute requirement. 

However, three black crows is used as a short-term analytical insight and is mostly moot when stretched over a period longer than a week or so.  It can be identified by having the following attributes:

  • Descending Candles: The crows or candlesticks as represented on the chart should have a declining value. Typically this means that the second candlestick should open and close lower than the first candlestick. And the third candle stick should open and close lower than the second stick. Furthermore, none of the candles should have a shadow or wick.
  • No Shadow or Wick: In candlestick trading a shadow or wick is a charted line that shows if the price of a stock has fluctuated higher or lower than the opening or closing price during the session. A security with three black crows will open and close at the highest and lowest prices of the trading sessions, resulting in the lack of a shadow or wick.
  • Only After an Upward Trend: Because three black crows is a reversal it should only be considered when the security in question is in an uptrend or bullish market. Meaning that after an extended period of growth the security is now beginning to consistently decline as opposed to a security that is already on the decline. On a chart it resembles three long, red, or black stairs.
  • Long Candles: Long candles are the result of high volume typically due to the previously bullish market. They also depict a certain consistency. This means that if one or more of the three candles are short then the downtrend isn’t as reliable or consistent. It’s good practice to wait for a new emergence of crows or to at least wait for data from a fourth session.

How to Interpret Three Black Crows Pattern?

By itself three black crows, while accurate in the short term, leaves a lot of usable data out and it is best used in conjunction with other patterns to get a more precise analysis. However, it does give a pretty strong indicator that it may be time to:

  • Unload Securities: Three black crows predicts falling market prices so unloading stock before those prices drop further is a go to choice for many. However, the pattern day trader rule which limits the buy and sell of the same stock and in combination with trading fees, make unloading stock that’s showing a downward trend for only three days a little risky. Especially when you consider that for three black crows to apply the stock had to have previously been on the rise.  
  • Buy Securities: Falling security prices are some trader’s worst nightmare but if you’ve had your eye on a certain security and are confident in the return of a bullish market then it’s a good time to buy. If used with other indicators you may be able to predict exactly when an uptrend is going to revitalize and when the lowest price of the stock will happen as well. 

How to Improve the Reliability of Three Black Crows Pattern in Candlestick Trading?

We know that the three black crows pattern in candlestick trading is rarely reliable as a standalone indicator, but what other indicators can you combine with it to get a better assessment on the future outlook of a financial instrument’s price performance? There are a few but the best indicators to consider are:

  • Market Context: One of the reasons the crows can be unreliable is because of how short-sighted the data can be. It’s not unusual for the crows to appear on a security that ends up returning to an upward trend especially if the fluctuation is normal within the context of the market. It’s a good practice to take a wider range of data for a particular security to see if the three crows are a normal part of that security’s upward trend. 
  • RSI: You can use RSI (Relative Strength Index) to create a more accurate picture of the security in a longer term. So if you have three black crows, but your market context tells you it’s normal, then you can use the RSI to verify both the normalcy of the changes and the reliability of the crows for that particular market. For example if the RSI of the stock is above 50 then you can assume an upward trend even if the crows say otherwise. 

How to Trade Three Black Crows Pattern in Candlestick Trading?

Now that you know what three black crows are in candlestick trading and a few techniques on making them more reliable; we’re going to discuss with you on how to use this pattern within a trading strategy. In particular, this pattern works really well with various swing trading strategies. 

Described below are several considerations that you should account for when swing trading using the three black crows pattern.

Market Environment

A market with high trading divergence is ideal for a swing trader using three black crows. The data from three black crows can give a swing trader a solid idea as to what the prices will be overnight or the weekend. Which are two of the riskiest times for any experienced swing trader. 

Identify and Confirm Trade Opportunity 

Use three black crows to establish the market trend and then compare the data using the RSI. Because a divergent market breaks trends you can consider the crows as a sign to buy. 

Determine Trade Entry, Stop Loss, and Take Profit Levels 

Enter trade when approaching the three day market low. Set stop loss at 5% lower than market value. A take profit level of 10% is safe and you can adjust as per experience and comfort.

Execute and Manage Trade

Swing traders take a calculated risk over periods of market close but there a few tips to be aware of:

  • Don’t view the crows as ominous at least not in a divergent market where the trends continue to reverse. 
  • Don’t use the crows for long term investments. The crows are little to no indication as to how a security will perform over the course of months or years. As a swing trader you shouldn’t be holding on to investments longer than a few days. 
  • Don’t buy early. The crows are most efficient when used on a three-day chart. It may sound like a good idea to shave a day off so you can make a trade before the end of day Friday but resist this urge. You make educated buys/sells and a big loss hits harder than a big win.

Advantages and Limitations of Trading Three Black Crows Patterns

Even though three black crows is considered a pretty reliable candlestick pattern in most trading circles, it does not come without its own set of advantages and limitations. To effectively trade using this pattern, it is critical to be mindful of these advantages and limitations. 

Therefore, in the following section, let us discuss the primary pros and cons of trading with the three black crows pattern.

Advantages of Trading Three Black Crows Patterns

Listed below are the primary advantages of trading the three black crow pattern – 

  1. On relative terms, it is an easy to identify and trade pattern
  2. For short-term price movements, its reliability is considerably high

Limitations of Trading Three Black Crows Patterns

Listed below are the primary limitations of trading the three black crow pattern – 

  1. It does not give any insights as to why trends are changing and could be untimely
  2. On many occasions, the bearish reversals indicated by the three black crows are momentary, and the market resumes its original trajectory shortly after the completion of the pattern

Candlestick Pattern Opposite to Three Black Crows Pattern

The opposite of three black crows are three white soldiers. Three white soldiers appear as three rising candles with ascending value. The soldiers are also constructed over the course of three consecutive sessions.

Author’s Recommendations: Top Trading and Investment Resources To Consider

Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.

Conclusion

The three black crows are a staple pattern for candlestick trading. All good traders familiarize themselves with the crows and a litany of other trading patterns. If you’re interested in learning more about trading, or finance, then check out a few of our other in-depth articles. Always remember that even experienced traders suffer losses. Trading is a risk. Make it a calculated risk. 

BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!

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    Navdeep Singh

    Navdeep has been an avid trader/investor for the last 10 years and loves to share what he has learned about trading and investments here on TradeVeda. When not managing his personal portfolio or writing for TradeVeda, Navdeep loves to go outdoors on long hikes.

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