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.