A 3 black crows pattern has three long black (or red) candlesticks. Each candlestick creates a downward staircase pattern by:
- Opening higher than the previous day's close
- Closing lower than the previous day's low
Now, let us visualise the three candlesticks individually:
1. First candlestick
- The first candlestick in the pattern is usually part of an established uptrend.
- It opens near the high of the session and indicates bullish sentiment initially.
- However, as the session progresses:
- Sellers take control and
- Push the price significantly lower by the close of the session
- This candlestick is typically long and black (or red).
- It signals a strong bearish momentum.
2. Second candlestick
- The second candlestick also opens higher than the previous day's close.
- Initially, it again indicates a potential continuation of the uptrend.
- However, similar to the first candlestick, sellers dominate the session and drive the price even lower.
- The second candlestick is also long and black (or red).
- It has little to no upper or lower shadows.
3. Third candlestick
- The third candlestick continues the pattern of the previous two days.
- It opens higher than the previous day's close.
- However, the buying pressure quickly fades as sellers push the price lower throughout the session.
- Like the first two candlesticks, the third candlestick is also long and black (or red).
- It has minimal shadows.
Example of how to use Three Black Crows
Let's take an example to illustrate how the Three Black Crows pattern can be applied in trading. Imagine we've been tracking a stock that has been steadily rising. Suddenly, we notice three consecutive downward-moving candlesticks, forming the Three Black Crows pattern. This pattern suggests a potential reversal of the upward trend and could signal a good opportunity to sell or take profits.
Traders often combine the Three Black Crows pattern with other technical indicators or confirmations to bolster their trading decisions. For instance, they might look for indicators that suggest the market is overbought or identify bearish divergences to reinforce their analysis.
How does using the three black crows pattern help traders?
Traders use the three black crows candlestick pattern to spot:
- Potential trend reversals and
- Shifts in market sentiment
Let us understand some of its major uses:
1. Indicates a bearish reversal signal
- This pattern signals a potential reversal in the direction of he trend.
- The consecutive series of three long black (or red) candlesticks with minimal or no shadows suggests a strong and sustained selling pressure.
- It indicates that bears have taken control of the market.
2. Shows the strength of selling pressure
- The length and colour of the candlesticks in the three black crows pattern show the strength of the selling pressure.
- The long black (or red) candlesticks indicate significant downward momentum.
- Also, these candlesticks usually have little to no wicks, which suggests:
- Minimal buying interest or
- Attempts to push prices higher
How to identify entry and exit points using the three black crows pattern?
For most traders who wish to follow a bearish trading strategy, the three black crows pattern can tell when to enter and exit the market. Let us understand the process in simple steps.
1. Determining entry points
Following are the steps to determine entry points
Step I: Identify the pattern
- Wait for the three black crows pattern to be fully formed.
- Ensure you have three consecutive long black (or red) candlesticks.
- These candlesticks must have minimal or no shadows.
- Once it is formed, you can interpret it to be a signal of a strong bearish reversal pattern.
Step II: Confirmation from volume
- Look for confirmation from trading volume.
- Ideally, the volume should increase with each of the three candlesticks.
- Once you gain the volume confirmation, you can assume that there exists a strong selling pressure in the market.
- To gain more confidence, you can also use other technical indicators or chart patterns to confirm the bearish signal.
Step III: Entry point
- Once you have confirmed the three black crows pattern, enter a short position.
- You can do this either at the close of the third candlestick or on a subsequent pullback if the price retraces higher.
2. Determining exit points and taking profit
Here are the steps for you to identify exit points to book profits-
Step I: Target price
- Determine a target price for your short trade based on the strength of the bearish reversal.
- You can decide this price level using:
- Support levels
- Fibonacci retracement levels, or
- Other technical analysis methods
- Make sure this target price represents a reasonable level where you expect the price to reach.
Step II: Trailing stop-loss
- Implement a trailing stop-loss strategy to protect your profits and manage risk.
- Set the stop-loss slightly above the high of the third candlestick.
- Alternatively, you can use a technical indicator, such as a moving average, to trail your stop-loss as the price moves in your favour.
Step III: Reversal signals
- Watch for reversal signals.
- These signals suggest that the bearish trend is lsing momentum.
- This situation usually happens when you observe:
- Bullish candlestick patterns
- Bullish divergence on oscillators, or
- The price breaks above key resistance levels.
Step IV: Profit taking
- Take profits when the price:
- Reaches your target price, or
- Shows signs of a potential reversal
- At this level, close your short position.
Three Black Crows Vs. Three White Soldiers
The Three Black Crows pattern is the inverse of the Three White Soldiers pattern. While the former signals a potential bearish reversal, the latter indicates a bullish reversal. The Three White Soldiers pattern consists of three consecutive upward-moving candlesticks, each with a higher high and higher low, suggesting a shift from bearish to bullish sentiment.
Traders assess the broader market context and current trend to determine whether the Three Black Crows or Three White Soldiers pattern is more applicable to their trading strategy.
Limitations of using Three Black Crows
While the Three Black Crows pattern is a strong indicator of a potential bearish reversal, it's important to acknowledge its limitations. Here are a few key considerations:
- False signals: Like any technical analysis tool, the Three Black Crows pattern isn't foolproof. The pattern may form, but the price may not actually reverse, leading to a false signal.
- Market context: It's crucial to assess the broader market context when using the Three Black Crows pattern. Factors such as overall market trends, trading volume, and other technical indicators can provide valuable additional insights and confirmation.
- Confirmation signals: Traders often seek confirmation from other indicators or patterns to strengthen the reliability of the Three Black Crows signal. Relying solely on this pattern without considering other factors may increase the risk of false signals.
Conclusion
The three black crows pattern is a popular candlestick pattern, often observed at the end of an uptrend. It gives a bearish signal and indicates a likely trend reversal from an uptrend to a downtrend. Traders identify this pattern by observing three consecutive long black (or red) candlesticks with minimal or no shadows. Using it, they gain clear entry and exit signals for bearish trading strategies.
