Candlesticks, on a candlestick chart, are a popular tool among technical analysts, as they give the analyst four pieces of data visually. Beyond the data that each candle can give—the open price, the close price, the high, and the low—candles can form recognizable patterns over several trading periods, which signal reversals, continuations, or market indecision. A classic, and easily identifiable, pattern in candlestick trading is the three white soldiers pattern.
The three white soldiers pattern is a proven bullish reversal indicator, and when spotted is best used by traders entering long positions, as the asset is predicted to enter a bull market. As with all candlestick patterns, they can occur on any candlestick chart, regardless of the type of asset being traded.
In the remainder of this article, we will explain the composition, implications, and uses of the three white soldiers candlestick pattern in more detail.
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Table of Contents
How to Identify Three White Soldiers Pattern?
As the name would suggest, the three white soldiers pattern is composed over three trading periods and made up of white (or green, depending on your charting application) rising candles. Typically, traders use a day as the trading period, but it could be divided into shorter periods, such as hours or segments thereof.
Key Characteristics of the Three White Soldiers Pattern
On a candlestick chart, there can be many occurrences of three white candlesticks in a row. Thus, they must satisfy the following characteristics to be a three white soldiers pattern as it is defined:
- Downward Trend: As this is a reversal pattern, it cannot occur in an already bullish market. If three consecutive white candles occur in an uptrend, it is not a three white soldiers pattern.
- Long Bodies: This indicates the strength of the bull day. It signals full control by the bulls and is an indication of the long-term mentality of the traders.
- Short Upper Shadows: A long shadow would indicate that the bulls took control of the market, but then lost momentum as the bears brought the close back down to a lower price. In short, look for candles that have an upper shadow no longer than half of the real body length, if not even less. Note: The lower shadow is of less significance. In a white candle, any push downwards has been regained, as evidenced by the higher closing price.
- Rising Opening Prices: The opening prices of the second and third candles should be around the midpoint of the respective previous candle; this indicates not only the bullish mentality of the market but also the increasing buying pressure and price.
- Rising Closing Prices: The candlesticks should close at progressively higher prices. Note: The candles should look like a set of stairs.
How to Interpret the Three White Soldiers Pattern?
The three white soldiers pattern indicates a shift in the psychology of the market and an increased demand for the asset. Thus, it could be the same traders who had a bearish mentality the day before the start of this pattern, suddenly shifted to buying.
Or, it could be that other bullish traders, who had previously not been trading said asset, enter when the price is low and drive up the price for three consecutive days.
In short, increasing demand (which is the cause of the buying pressure) drives up the price and discourages the prior, bearish, selling mentality.
How to Improve the Reliability of the Three White Soldiers Pattern?
In Thomas Bulkowski’s book Encyclopedia of Candlestick Charts, he states that the three white soldiers pattern correctly indicated a bullish reversal 84% of the time. Thus, the pattern is very reliable, and when used in conjunction with other indicators, it is a useful tool for a trader.
Bulkowski does warn, however, that if the candle following the pattern does not continue the upward trend, it could be a false signal, and result in a reversal of the three-day rally.
To avoid false signals, it is recommended to look for other indicators, such as:
- Channel Indicators
- Moving Averages
- Stochastic Oscillators
- Relative Strength Index
- Marubozu Candles
- Bearish Reversal Candlestick Patterns
In the next section, we’ll discuss how you can use these various indicators in conjunction with the three white soldiers pattern for a more successful trade.
How to Trade Three White Soldiers Pattern in Candlestick Trading?
Trading using candlestick patterns involves identifying the pattern, often confirming its signal with another indicator or tool, and then entering a trade in response to the predicted price action.
Using the three white soldiers, a trader should look to enter long, because he predicts an upward trend; this is done by buying the asset (stock, bond, currency, commodity, etc.) at the low, when the trend is confirmed, and selling when the price has risen.
- Market Environment: As stated, the market must be in an established downward trend for this pattern to occur. Look for a trend using support and resistance indicators, such as channel indicators, by overlaying a moving average line onto the chart, or by drawing trend lines based on the successive rally peaks.
- Identify and Confirm Trade Opportunity: When the pattern has been spotted, over three trading periods, this signals a reverse in trend, and an opportunity to go long, as the price is anticipated to rise in the coming bull market.
- Determine Trade Entry: Enter by buying the asset; this can be done after the close of the third period, once one has confirmed the reversal via a stochastic oscillator or the Relative Strength Index, which can signal bullish buying pressure, or after a breakout from a channel indicator. Alternatively, wait for a fourth candle to continue the upward trend before placing an order.
- Set a Stop Loss: Place a stop loss at or around the open of the first candle, this will allow for some market pullback, but will protect against a sudden reversal after the short rally.
- Exit and Take Profit Level: This is dependent on one’s risk appetite and the current market. As always, the goal of trading is to buy low and sell high. Sell before the next trend reversal, at the peak of the bull market, for maximum profits. For short term traders, Bulkowski recommends waiting no longer than ten trading periods, or until gains are around 2%. Note: Gregory L. Morris found that the gains from trade using three white soldiers on average yields about half a percent per day after the trade entry, but in his book, only measures trades held for seven days.
- Execute and Manage Trade: Be mindful that this can be a brief rally, and look for signals, such as a long black Marubozu candle or other bearish reversal candlestick patterns.
Advantages and Limitations of Trading Three White Soldiers Patterns
Now that we have covered the basics, let us quickly discuss a few advantages and limitations of trading the three white soldiers pattern before closing this article.
Advantages of Trading Three White Soldiers Patterns
Listed below are the primary advantages of trading the three white soldiers pattern –
- On relative terms, the reliability of this pattern in identifying trend reversals is sizably high
- It is easy to spot and trade using this pattern
Limitations of Trading Three White Soldiers Patterns
Listed below are the primary limitations of trading the three white soldiers pattern –
- It is a rare pattern in candlestick trading and does not occur frequently
- The revered trend that this pattern indicated could be very short-lived
Candlestick Pattern Opposite to Three White Soldiers Pattern
The opposite of the three white soldiers pattern is the Three Black Crows pattern. It is used in an uptrend to signal a bearish reversal of the trend.
Most of the time, the inverse reversal pattern uses the same name as its counterpart. However, in this case, the bearish indicator uses the word “crows” because in Japanese culture (where the Candlestick Chart originated from), crows are a bad omen.
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Conclusion
Candlestick patterns are an excellent tool for assessing market psychology and predicting price action. Three white soldiers, specifically, is a good pattern to learn when starting, because it is easy to spot and a commonly referenced model.
It is useful when trading because it is relatively reliable, in comparison with other candlestick patterns, and thus can be used by beginners who have not yet mastered other indicators. Although, it can, of course, be confirmed with other trend indicators for a more reliable signal.
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