If you would like to become a successful day trader, it is important to know your chart patterns inside and out.
Chart patterns are formed over time and comprise of multiple candlesticks. They are popular among traders because they have the ability to predict future price-action with a high probability.
There are several useful patterns we watch for here at Warrior Trading and some are very useful to quickly assess your trading opportunities and understand the current market structure.
On this page, you’ll learn everything you need to know the three black crows pattern.
In the first section of the article we will discuss what it is and later provide useful tips for trading this pattern.
What is the Three Black Crows Pattern?
The three black crows pattern is a bearish reversal pattern consisting of three consecutive bearish long candlesticks that trend downward like a staircase.
This pattern forms at the peak of an uptrend and indicates a strong reversal in the stock price. The continuous downward movement highlights the strength of the bears and they are now in charge of the stock.
Each of the three candlesticks should be long-bodied bearish candlesticks, and each candlestick opening price should be lower than the opening price of the previous candlestick.
The open of one candle is slightly higher than or almost at the same level with the close of the previous candle.
A pattern opposite the three black crows is called three white soldiers. This is a bullish reversal formation that occurs in a strong downtrend and signals a change in direction.
As with the bearish formation, the three white soldiers consists of three consecutive bullish candles, with each one of them closing higher than the previous candle.
What the Three Black Crow Pattern Looks Like
The three black crows is identified as three red (or black) candlesticks in a row where each candle opening is lower than the previous bars open.
Here is a list of the conditions that must be met for the pattern to form:
- There must be three negative candlesticks
- All three should close in the lower fourth of the range.
- The upper wicks should not be very tall
So, for a valid signal, the open price of each candlestick ought to be lower than the last open and the close should be lower than the close of the last. The pattern should form at or near a chart top so that the first bar makes a recent high.
Why It Forms
Three black crows pattern forms during an uptrend, often indicating an end of a bull run in the market. It forms when bears overtake the bulls during three consecutive trading sessions. In short, it is a strong indication of a bearish trend reversal.
After markets have been strong for some time, it is natural for the bulls to loosen their grip and allow the bears to have some fun hence sending prices lower. This pattern tells traders that a bearish trend is on the horizon and prices are expected lower in the upcoming sessions.
For example, in the chart above, the bears have driven price lower for three successful session causing red bars to be formed. This is the foundation of the three black crows pattern.
Each candle opens within the body of the previous one, though it is not mandatory. The first candle emerges during an uptrend and the subsequent two form during the downtrend.
It can also form near a Doji – an indecisive candlestick formation that illustrates market indecision before a trend reversal. It is also worth mentioning that the pattern can appear in either bearish or bullish trends.
In a bearish trend the three black crows will often appear in bearish rallies or short upswings.
Example of a Three Black Crows Pattern.
As seen in the illustration below, the three black crows pattern appears after a strong uptrend and signals the start of a new downtrend.
Belonging to the family of reversal patterns, the three black crows is a powerful pattern. It signals weakness in an established uptrend and the potential formation of a downtrend.
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.
Aside from signaling that the trend is changing, it is also, confirming that the price action is changing direction. This is because of the shape of this pattern as it consists of three candles.
While this is an advantage of this formation compared to the other reversal patterns, the apparent weakness is that the three candles carry the price action far away from the recent low/high. This makes it more difficult to trade from a risk-tolerance perspective.
Tips for Trading the Pattern
As mentioned earlier, three black crows pattern ushers in the bearish trend in the market. Once you have spotted what may be a three black crows pattern, you need to pay attention to the length of the candlesticks.
The second and third candles should be approximately equal in size, to confirm that the bears are totally in control. If the third candle is clearly smaller than the others, this is a sign of weakness and the pattern is not as useful.
The pattern starts to develop once an uptrend becomes exhausted. This indicates a strong downtrend is forming and you should enter a short position.
Ideally you want to enter after the pattern has formed on a mini pullback. As you can see in the chart above the Three Black Crows pattern forms then has two candles of consolidation before continuing lower.
Stops should be above the start of the pattern with the idea to catch a break below the chart pattern. This could be a pullback to a moving average or some other level of support.
Bottom Line
Crows are considered to be bad luck. The three black crows pattern may have got the name since its formation hints the end of an uptrend.
It belongs to the family of Japanese candlestick charts that are now widely used by day traders to predict trend changes and plan market entry or exit positions.
This pattern indicates that after a run, the uptrend is fading, and the bears are taking control. It can help you capture reversals and get into the trade before the real momentum kicks in.
When it occurs at the top of any trend, it indicates a negative reversal and possible profit-taking in a particular stock or the market in the subsequent sessions.
However, like other candle formations, the three black crows pattern has its limits.
Therefore, traders should use it in conjunction with other technical indicators and chart patterns to confirm reversals.
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