There’s no doubt that candlestick patterns make one of the most popular technical analysis tools for traders who want to gain an edge in the market. One important formation that traders see on candlestick charts is the three white soldiers pattern.
So, in this article, we’ll cover everything you need to know about what to expect when a trio of white soldiers comes marching into the market.
What’s the three white soldiers pattern?
The three white soldiers is the name of a multiple candlestick formation that technical traders use to analyze charts such as stocks, commodities, currencies, etc. Considered a reliable indication that a trend reversal will happen, traders use this pattern to find a potential entry in the market.
Think of the three white soldiers as a military unit marching forward in unison, with each soldier representing a strong bullish candle. This bullish indicator signals a reversal of a downtrend and that a bullish trend is expected to follow. So, just as a military unit marching forward with determination can conquer new territory, the three white soldiers tell us that the buyers are in control and prices are sure to rise. In other words, it shifts the market sentiment from bearish to bullish and lets traders know of a change in direction.
Thus, this candlestick pattern functions as a signal flare from the market, telling traders the tide is turning and giving them the green light to get on board the new trend.
How should traders respond to the three white soldiers pattern?
Every candlestick pattern is a representation of current market data. Thus, these patterns tell traders information about the market that can influence trading decisions. To best understand how to respond when you see candlesticks forming three white soldiers, you need to have a keen understanding of what this formation means in a market environment.
So, we know the three white soldiers pattern is a bullish signal reversal indicating a gradual advance of buying pressure following a downward trend. But let’s dig a little deeper. How does this increase of buying pressure spark? Well, because the bears are getting burnt out, their exhaustion acts as an enabler for the bulls to “soldier on” (pun intended). This is how the weakness in what was an established downtrend indicates a possible emergence of an upward trend.
To put this all simply– this pattern tells traders to strike while the iron’s still hot. They should leverage the bullish momentum as the market is ready to make a big move up. So, depending on what professional trading strategies a trader uses when they notice a bullish three white soldiers forming, they may consider opening a long position to gain (profit) from an upward trajectory.
How to identify a three white soldiers pattern
You’ll most likely see this candlestick pattern at the bottom of a downward trend. But what should you be on the lookout for? Let’s go over the three components that signal the bullish soldiers are marching forward.
Long candle bodies
A three white soldiers formation will show three successive, long candlesticks. Each candlestick must also be bullish, meaning they’ll all be either white or green– depending on the candlestick chart you’re looking at. Luckily, this pattern is pretty hard to miss. This is because the large and lengthy candle bodies form big bar ranges, which make an eye-catching pattern.
Candles open within the previous body
A three white soldiers pattern will produce a staircase-like formation since it shows a price climbing higher and higher. Each candle will open and close progressively upward to designate a new short-term high.
So, on a candlestick confirmation chart, it’ll look like each candle opens within the body of the candle that precedes it. Likewise, there shouldn’t be any gaps between each of the three candle bodies. This means that they open in the middle price range of the previous day on the market.
Small or no wicks
Each candle should have an upper wick (also called “upper shadow”) that’s either very small/short or nonexistent. These wicks tell traders that the bulls have managed to keep the price of an asset close to the height of its ranges for the given period. In other words, it shows the strength of bullish momentum.
The three white soldiers pattern vs the three black crows pattern
Just like the formation of three white soldiers, the three black crows is a candlestick pattern used in technical analysis of the financial markets. But seeing three black crows means something completely different than seeing three white soldiers.
We know that the three white soldiers is interpreted as a bullish signal that indicates the market has reversed from a downward trend to an upward trend. Conversely, the three black crows is interpreted as a bearish trend that indicates the market has reversed from an upward trend to a downward trend. This makes these two candlestick formations mutually exclusive for any given stock, commodity, etc.
As a nod to the omen of the black crow, the three black crows pattern doesn’t signal hope as the three white soldiers do. Think about it this way– the three black crows pattern can be compared to a group of ominous birds flying overhead, each representing a strong bearish candle. Just as a group of black crows can be seen as a sign of impending doom, the three black crows indicate that sellers are in control and prices are likely to fall.
How to trade with the three white soldiers pattern
Trading with the three white soldiers formation in mind is like a game of chess– you have to be patient and look for the right moves. It can be a profitable strategy, but it can also lead to losses. So, let’s take a look at a basic outline of what you should do when three white soldiers come marching onto the market.
First, you need to check that what you’re looking at is a three white soldiers formation (you can refer to our criteria mentioned above to identify this pattern). To confirm that the candlestick pattern is signaling a reversal, you should look for additional signals like a break above resistance, a positive cross of moving averages, or an increase in trading volume.
Okay, once you’ve confirmed the pattern is a bullish trio of white soldiers, you’re ready to place a long position. You can place a long (buy) position at the close of the third candle. And your stop loss should be placed just under the lowest height of the pattern. This will mitigate the potential losses should the reversal fail to materialize.
Lastly, you’ll need to set a profit target. You can set your profit target using technical analysis tools like trend lines or the relative strength index. Also, you can use a risk-reward ratio to determine the appropriate target. It’s up to you to figure out what your trading strategy parameters are and how you want to use them in conjunction with this candlestick formation.
An important note on volatility
Volatility can affect the three white soldiers pattern in many ways. For instance, volatility can make it more difficult to confirm that this pattern is signaling a reversal. This is because when you’re in the midst of a volatile market, price swings can be exaggerated. In turn, this makes it challenging for even the Warren Buffet of traders to differentiate between a temporary reversal and a longer-term trend change.
Also, volatility can impact the placement of stop-loss orders when trading with this pattern. When the market is in a volatile state, prices can swing dramatically, which is why it’s critical to place stop-loss orders at a sufficient distance from the entry point. This will help traders avoid being stopped prematurely.
So, to improve your trading strategy, remember to never use technical analysis in isolation. It’s wise to always consider other factors like fundamental analysis and market news before stepping into the market and making a trade.
The bottom line
The three white soldiers pattern is a valuable technical analysis tool. When combined with other technical analysis tools and strategies, it offers a more comprehensive view of the market and can drive up the accuracy of your trades.
Now that you have a better understanding of this candlestick pattern, you can leverage it when you’re trading to identify potential reversal points and capitalize on bullish trends.