Three White Soldiers and Three Black Crows

The three white soldiers and the three black crows candlestick patterns are reversal patterns that predict a change in the direction of a trend. Both patterns consist of three consecutive candles, which makes them less frequent than some other candlestick patterns. 

 

It's important to note that both formations are only valid when they appear after a strong uptrend or a downtrend, while their efficiency decreases in choppy markets.

How can you spot them

The three white soldiers is a bullish reversal pattern which occurs in a strong downtrend and signals a change in direction. The formation consists of three consecutive bullish candles, with each one of them closing higher than the prior candle. 

 

Since it consists of three candles, this pattern almost single-handedly confirms that a reversal is taking place now, as there is considerable bullish force behind the creation of this pattern. As seen in the illustration below, the three white soldiers appears after a strong downtrend that usually ends in the printing of a new short-term low. 

A pattern opposite the three white soldiers is called three black crows. This is a bearish reversal formation which occurs near the top of the current uptrend, as it generates a reversal signal. As with the bullish formation, the three black crows consists of three consecutive bearish candles, preferably with long bodies, that takes the price action lower as each candle pushes further lower.

Why should you pay attention to these two patterns?

Belonging to the family of reversal patterns, the three white soldiers and the three black crows are powerful patterns. After a strong trend in one of the two directions, the other side has grown into the game and feels more confident, which finally allows it to stage a reversal.

 

Besides signalling that the trend is changing, they are also, confirming that the price action is changing direction. This is due to the shape of this formation as it consists of three candles. 

 

While this is an advantage of these two patterns compared to the other reversal formations, the apparent weakness is that the three candles carry the price action far away from the recent low/high, making it more difficult to trade from the perspective of risk tolerance.

Before we continue with sharing tips on how to trade these patterns, you can check out the MetaTrader5 trading platform, and get familiar with different candlestick formations.

How to trade the three white soldiers

As noted earlier, the fact that the three white soldiers consists of three consecutive candles makes this formation less frequent than other reversal patterns. The EUR/USD pair trades in a clean downtrend below. 

 

At one point, the price action hesitates to continue in the same trend, an opportunity utilized by the bulls to push the price higher. As you can see, there are three strong bullish candles taking the price action higher to ultimately create a strong reversal.


 

In this example, you see the three white soldiers completely overwhelming the bears with force and determination. A strong reversal is also not surprising given the huge gains that the bears were able to make previously in a strong downtrend.

How to trade the three black crows

Let’s now see how the three black crows candlestick formation works, as well as how to trade it in detail.

 

In the chart below, you will see USD/JPY trading sideways on the left half of the chart. The price action suddenly bursts higher to create a short-term high. However, the bulls are unable to sustain the positive momentum despite two strong bullish candles. 

 

The bears use this opportunity to create three consecutive bearish candles, and therefore change the trend direction. What follows is a strong push lower as the bulls were unable to capitalize on the initial bullish momentum.

 

Our entry is at the level where the third candle closed. The stop-loss is placed above the most recent high, which makes it challenging to trade this setup, given that we are risking more than 200 pips in this trade. 

 

Again, this is the biggest weakness of this pattern. The distances between the entry and stop loss are sometimes longer than even 200 pips, as is this case. Hence, in order for this setup to work, the take profit has to be at least 300 pips. 

 

While the wide stop loss makes it challenging, the high probability that the price action is reversing is partially offsetting the main weakness. While on the other hand we risk more, the fact that the reversal is all but confirmed makes it easier to commit to a trade.
 

In order to identify take-profit orders, we have to go to the weekly chart and see previous levels that had an important role to play in the past. This way, we could see that the $104.70 - $105.00  area has been historically important for USD/JPY and, therefore, we believe that this level can act as a magnet and attract price action. 

 

In general, you can use any other technical analysis tool to come up with important data points. Whether it is the Fibonacci retracement or extension, trend lines, moving averages, it doesn’t matter as long as you have empirical evidence that the particular level is important. 

 

Finally, we have our trade elements in place: the entry is at $110.20, stop-loss is located above the most recent high near the $112.40 handle, while the take-profit order is placed at $105.00. This way, we are risking around 220 pips in order to make 500+ pips, which constitutes a very attractive risk-reward ratio. 

 

Given the challenges that these two patterns produce from the risk tolerance perspective, we'd like to encourange you to trade with virtual funds first, before you move to live markets. This way, you will see for yourself how these patterns work, and what the risks and rewards associated with them are, before you start risking your own capital. You can open a demo account here.