Three Black Crows
Three Black Crows is a pattern used in technical analysis on stock market. Three Black Crows is a bearish reversal signal that leads to actual reversal 79% of the time that is appears. For this rule to apply, you would expect to find the signal at the top of a current uptrend. Upon recognizing it, you would want to take immediate action to close out a long position or to open a short position. The position may involve shares of stock, exchange-traded funds, or options.
The attributes of three black crows are quite specific. It consists of three consecutive sessions. Each session opens within the range of the previous real body and closes lower. Thus, each session starts with a lower high and ends with a lower low.
The pattern is found frequently on stock charts, although perfect placement at the top of an uptrend is not always the case. It may show up once a downtrend has already begun, and acts as confirmation that the uptrend has ended. However, a problem with this pattern is that once it appears, the downtrend may be well under way already, so some price movement has occurred and an opportunity to maximize profits is lost, at least partially[1].
Three Black Crows - rules of recognition
The Three Black Crows is made up of three black candles with consecutively lower closes. This is a top reversal pattern if seen after an extended rally or at a high price area.
Rules of recognition:
- An uptrend must be in progress.
- This is followed by a trend reversal with the formation of three black candles, each with a lower close.
- Each subsequent candle should open within the previous session's black real body, but this overlap is not a rule. An open at or a little lower than the previous session's real body is also valid.
- Each of the black candles must close at or near its lows.
- Its Japanese name is sanba garasu.
The Three Black Crows is the mirror image of the Three White Soldiers. It forewarns of lower prices and is a sign of weakness ahead. The three black candles imply strong selling by the bears[2].
Three White Soldiers and Three Black Crows
Clarity of signals is a great advantage in candlestick analysis. Among these are two three-day candlestick signals, the three white soldiers and three black crows. Although the patterns are not easily found in strict adherence to the pattern requirements, they are powerful reversals when they do occur in the proper proximity.
Three white soldiers is an exceptionally strong bullish reversal signal and useful when located close to support after a strong downtrend. The proximity for three white soldiers is at very bottom of a downtrend or shortly after the reversal has begun( in which case the pattern confirms the change in direction). For three black crows, the correct proximity is at the very top of an uptrend or shortly after price has begun to turn downward. Both are reversal indicators. Some analysts claim that when these are found in the wrong proximity for reversal they are continuation signals. However, this is not necessarily the case. When these occur during a trend (three white soldiers during an uptrend or three black crows during a downtrend), they are simply coincidences and provide no actionable information[3].
Examples of Three Black Crows
- Charting Example: Three Black Crows is a bearish reversal pattern that is composed of three consecutive long-bodied candlesticks that have closed lower than the previous session. Each candlestick opens within the body of the previous candlestick and closes near its low. The pattern appears in an uptrend and signals that the trend may be reversing.
- Stock Market Example: Three Black Crows can be seen in the stock market when there is a prolonged period of buying pressure followed by three consecutive days of lower lows and lower closes. This indicates that the bullish sentiment that was present has been replaced by bearish sentiment and the trend may be reversing.
- Options Trading Example: Three Black Crows is also common on options trading. When the market is in an uptrend, an options trader may see the Three Black Crows pattern on a chart and decide to close out a long position or open a short position. This would allow them to take advantage of the reversal and capitalize on the bearish sentiment.
Advantages of Three Black Crows
The Three Black Crows pattern is a powerful tool for technical analysis of stock markets that can be used to successfully identify reversals of trends. It has a high accuracy rate, making it an attractive option for traders. Here are some of the advantages of the Three Black Crows pattern:
- It is an easily recognizable pattern that can be quickly identified by traders.
- It has a high accuracy rate of 79%, making it a reliable indicator of trend reversals.
- It is a relatively simple pattern to understand and use, making it suitable for amateur traders.
- It can be used to identify both long and short-term trends, giving traders the flexibility to choose the best option for their trading strategies.
- It can be used to confirm other technical indicators, allowing traders to make more informed decisions.
Limitations of Three Black Crows
- The Three Black Crows pattern is not infallible and can sometimes fail to indicate an impending reversal.
- It can be difficult to differentiate between a Three Black Crows pattern and a normal price dip, making it difficult to determine when the pattern is present.
- The Three Black Crows pattern is more likely to occur in an established uptrend, but can occur in any market environment.
- The Three Black Crows pattern is not a guarantee that a reversal will occur, but rather a signal that one is possible.
- The Three Black Crows pattern may not be suitable for short-term traders, as it takes several days for the pattern to form and the reversal to take place.
There are a variety of other technical analysis methods that focus on bearish reversal signals which can be used in a similar way to the Three Black Crows pattern. These approaches include:
- The Evening Star Pattern, which is a three-candle pattern that signals a potential bearish reversal. It consists of a large white body followed by a small body, with a large black body forming the third and final candle.
- The Abandoned Baby Pattern, which is a three-candle pattern consisting of a large white body followed by a doji, followed by a large black body. This pattern is a strong indication of a potential bearish reversal.
- The Dark Cloud Cover Pattern, which is a two-candle pattern consisting of a large white body followed by a large black body which opens above the close of the first white body. This pattern is also a strong indication of a potential bearish reversal.
Overall, there are a variety of other technical analysis methods that can be used to identify potential bearish reversals similarly to the Three Black Crows pattern.
Footnotes
| Three Black Crows — recommended articles |
| Bullish divergence — Bull flag — Dragonfly Doji — Bearish divergence — Bear flag — Uptrend — Price pattern — Osma — Three white soldiers |
References
- Tam F.K., (2015), The Power of Japanese Candlestick Charts, John Wiley & Sons, Singapore.
- Thomsett M.C., (2019), Practical Trend Analysis, Walter de Gruyter GmbH & Co KG, Boston.
- Thomsett M.C., (2014), Profiting from Technical Analysis and Candlestick Indicators, FT Press, New Jersey.
Author: Karolina Morga
