Three white soldiers
| Three white soldiers |
|---|
| See also |
Three white soldiers is a pattern used in technical analysis on stock market ;a group of three white candlesticks with consistently rising closing prices[1]. The pattern predicts a downtrend.
Bulls and bears
Before you get acquainted with the concept of bulls and bears on the stock exchange, you need to know what a short and long position when trading in the Forex market.
- Long position — allows you to earn on the growth of the asset.
- Short position — allows you to make a profit on the fall of the value of the asset.
Bulls are market players who use long positions (to buy) in anticipation of the growth of the asset, playing on the increase, they buy and thus drive the price up[2].Bull on the stock exchange characterizes the optimism and confidence of investors in the expectation of good results.
Bears are market players, for the current short positions (for sale) in anticipation of the fall of the asset, playing on the decline, they sell, thereby pressing the price down[3]. Any trading position designed for growth will belong to the side of the bulls, because it is believed that the bull throws the price on its horns up. And, if we open a position, hoping to reduce the value of the asset, we find ourselves in the bear camp.
The movement of the market is constantly changing, up and down, and depending on what position we have to open, we become bulls and bears on the stock exchange. So, if the trend goes up, it is a bullish market, if the trend goes down, it is a market with a downward trend.
Three White Soldiers is a bullish reversal pattern.
Characteristic of Three White Soldiers
If three white soldiers appear in the area of low prices after a period of stabilization-this is a sign of the potential strength of the market.
This model reflects a gradual steady increase in prices. The opening price of each white candle is within the white body of the preceding candle or near it. The closing prices of candlesticks are equal to the maximum prices or close to them. This is quite a "healthy" way to increase the market (although if the candles are too stretched, it may be a sign of overbought market).
The opening price of the second and third days can be at any point of the previous body. It is also best if prices open in the middle of the previous day's range (body)[4]. Remember that when a trading session opens, there should be enough bears in the market for the day to open below the previous closing price. This suggests that healthy growth is always accompanied by some resistance.
Pattern recognition rules[5]:
- Three long white candles appear consecutively, the closing price of each candle is higher than the previous one.
- Each opening price is inside the body of the previous candle.
- Each candle closes at or near the daily high.
Advance block pattern
If the second and third candlesticks (or only the third candle) show signs of weakening, the advance block pattern is formed[6]. It says that the rise in prices meets resistance, so the bulls should protect their positions. This model should be especially alarming if it appears after a long upward trend. Signs of market weakness may also be gradually decreasing body of white candles or relatively long upper shadows of the last two candles.
Stalled pattern
If the second candle has a long white body and registers a new high, followed by a small white candle, a stalled pattern is formed. This model is sometimes called the deliberation pattern. It signals that the onslaught of bulls is weakening, at least for some time. The last small candle can either form a gap relative to the long white body (in this case it becomes a star), or, as Japanese analysts say, "sit on his shoulder" (i.e. be at the top of the previous long white body).
A small white candle indicates the decline of the bulls ' strength. When a stalled pattern appears, it is better to close long positions and realize profits. Although the advance block pattern and the stalled pattern are not usually signals of a reversal at the top, there is sometimes a significant drop in prices after them[7]. When these models appear, long positions should be liquidated or protected, but short positions should not be opened in this situation. These models are of great importance in the field of high prices[8].
Examples of Three white soldiers
- The Three white soldiers is a bullish reversal pattern that signals the end of a downtrend. This pattern typically consists of three consecutive long-bodied candles with higher closes each day. The pattern forms when the price opens near the low of the day, trades lower and then rallies to close near the high of the day. This suggests that the buyers are in control of the market and that the price will continue to move higher.
- A real life example of Three white soldiers occurred in April 2019 in the S&P 500 Index. After initially trading lower in the first two weeks of April, the index formed three consecutive white candlesticks, closing higher each day. This signaled a change in the trend, and the index went on to rally during the rest of the month.
- In the foreign exchange market, Three white soldiers can also be seen. For example, in June 2018, the EUR/USD pair formed three consecutive white candlesticks with higher closes, signaling a reversal from the downtrend that had been in place for the previous two months. The pair went on to rally over the next two weeks.
Advantages of Three white soldiers
The Three White Soldiers pattern is a bullish reversal pattern used in stock market technical analysis that signals a strong uptrend. It consists of three consecutive long-bodied candlesticks with consecutively higher close prices. Here are the advantages of the Three White Soldiers pattern:
- It signals a strong uptrend, which can indicate the end of a correction or bearish trend.
- It is a reliable pattern that can be used to confirm other bullish reversal signals.
- It provides traders with a clear entry point for placing long orders.
- It can provide a strong indication of future price movements.
- It can be used as an early warning sign of market reversal.
Limitations of Three white soldiers
The Three white soldiers pattern is a reliable indicator for predicting a bearish reversal, however, it is not foolproof and there are certain limitations to be aware of when using it. These limitations include:
- The pattern requires three consecutive up days. If the market gaps up on the third day, the pattern loses its predictive power.
- The pattern is not effective in markets with low liquidity, as the price action may not be significant enough to form a reliable pattern.
- The pattern may not be reliable in volatile markets, as the price action may be too erratic to form a reliable pattern.
- The pattern is based on a short-term trend and may not be indicative of a longer-term trend.
- The pattern may not be reliable in markets with high levels of manipulation, as the price action may be artificially inflated.
The Three White Soldiers Pattern is a popular technique used in technical analysis on stock markets. It typically consists of three white candlesticks with rising closing prices, which is seen as a signal of a potential downtrend. There are a few other approaches related to this pattern that traders can use to further analyze their trading strategies:
- The Three Black Crows Pattern is the reverse of the Three White Soldiers Pattern. This pattern involves three black candlesticks with falling closing prices, which is seen as a signal of a potential uptrend.
- The Three Line Strike Pattern also uses three candlesticks but with a different pattern. It consists of three candlesticks that each open within the body of the previous one and close at the same level, which signals a potential reversal of the current trend.
- The Tweezer Pattern is a combination of two candlesticks with matching highs or lows, which can be either white or black. This pattern is used to identify potential trend reversals.
In summary, Three White Soldiers Pattern is a technique used in technical analysis to identify potential downtrends. There are several other related approaches that traders can use to further analyze their trading strategies, such as the Three Black Crows Pattern, the Three Line Strike Pattern, and the Tweezer Pattern.
Footnotes
References
- Edwards, R. D., Magee, J., & Bassetti, W. C. (2016)., Technical analysis of stock trends, Published by The International Federation of Technical Analysts
- Jönsson M. (2016)., The Predictive Power of Candlestick Patterns
- Kole E. (2010)., How to Identify and Predict Bull and Bear Markets, Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam
- Marshall B. R., Young M. R., Rose L. C. (2006).,Candlestick technical trading strategies: Can they create value for investors?, Journal of Banking & Finance 30, 2303–2323
- Morris G. L. (2012).,Candlestick charting explained, Published by The McGraw-Hill
- Nison S. (1991)., Beyond Candlsticks. New Japanese Charting Techniques Reveale, Published by John Wilery & Sons
- Rockefeller B. (2011)., Technical Analysis For Dummies, Published by Wiley Publishing
- Technical Analysis (2019), Technical Analysis
- Think Market (2014).,Introduction to candlestick patterns. Learning to Read Basic Candlestick Patterns
Author: Anastasiia Ilnytska
