Patterns Including Three Candlesticks

Patterns including three candlesticks

This lesson will cover the following

  • What are these patterns?
  • What information do they carry?

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In the previous two articles we described some of the most common single and double candlestick patterns. This article will be all about triple candlestick patterns and will include the Evening and Morning Star patterns, Three Black Crows and Three White Soldiers, Three Inside Up and Three Inside Down patterns and Three Outside up and Three Outside Down.

Evening Star and Morning Star

Star-full-iconEvening Star and Morning Star, as you can guess, are two opposite patterns, which attempt to foresee a trend reversal. We will describe all the peculiarities of the Evening Star pattern and leave the Morning star, because it is completely identical, but from a bullish point of view. Both of these patterns are considered as generally very reliable and with very few drawdowns.

The Evening Star is a bearish pattern which occurs at market tops, very often marking the end of an uptrend. It consists of three candles. The first one is a solid bullish candle, followed by a small candle, known as a “star” – this is where the pattern derives its name from. The formation of the star implies an opening gap, just as the Dark Cloud Cover pattern, but as the price then drops and its body forms, it should not cross the body of the first bullish candle. The middle candle can be of either color. Check out the picture below.

1. Evening star

The middle candle can also be a Doji and such a pattern is known as an Evening Doji Star. Even if it’s not a Doji, the middle candle is always relatively similar to it, representing a sudden halt in market movement and the battle between bulls and bears.

For this pattern to play out, the third candle needs to be a solid bearish one, representing the win the sellers had over the buyers during the plotting of the “star”. The third candle’s body should also not cross the star, which however rarely occurs and is not a mandatory condition for the pattern. The most important requirement however is that the bearish candle must deeply penetrate the body of the bullish one, with the amount of penetration being the most significant factor – the third candle’s body should extend to at least 2/3 or even ¾ of the first one’s height.

The pattern is considered failed if the market closes above its high, and is deemed triggered if it closes below the pattern’s low.

The interpretation is pretty simple and straightforward. We have a clear uptrend, dominated by the buyers, as visualized by the first solid bullish candle. Suddenly a turnaround begins to occur, with the “star” reflecting the buyers’ inability to push the price higher as bears regain strength and grow in numbers. The third candle (solid bearish) then marks the sellers’ victory.

Three White Soldiers and Three Black Crows

As you can guess from their names, these are two opposite patterns, each of which consists of three identically colored candles. They serve as reversal patterns, with the Three White Soldiers indicating a bullish reversal, while the Three Black Crows – a bearish. We will discuss the Three White Soldiers and skip the Crows, because they are identical to the Soldiers but from a bearish point of view. Here is how the Three White Soldiers Pattern looks like.

2. Three soldiers-crows

The Three White Soldiers pattern comprises three consecutive bullish candles of similar size which form after a downtrend. Preferably the second candle should be bigger than the first one and the third one should be at least the size of the second one. This is important, because if the third candle is significantly smaller than the previous ones, it would indicate that the bulls are not in complete control over the market movement. This would suggest weakness to some extent and could be a reason for the lack of a trend reversal.

You should be cautious with overextended bodies, because the market could become overbought or oversold, which can lead to a correction.

The candles are preferably long and have small or almost no upper shadows, which means they close at or near their highs. Generally, you don’t need to look for the perfect candles that have no wicks (Marubozu), but if the shadows are too long and even equal or exceed the length of one of the bodies, then you need to remain wary as the bears are still fighting.

The candles should open within the body of the previous candle or at its high.

Drawback

Exclamation-mark-iconHowever, one distinct drawback of the Three White Soldiers pattern is that its recognition requires a lot of time, which means that a large part of the newly formed and confirmed trend has already passed. The second candle is considered by many professional traders to be the best entry spot and its best played on a pullback or throwback.

The pattern is considered as stronger if the open of the second and third candles coincide with the close of the previous candles (first and second ones). It will also bear more strength if it occurs not just after a long downtrend, but after a sideways consolidation which had followed the downtrend and separated it from the pattern.

Three Inside Up and Three Inside Down

These two opposite patterns are as well of reversal nature. The “Up” pattern is bullish and occurs at market bottoms, while the “down” pattern is bearish and forms at peaks. We will discuss the Up pattern and skip the Down because they are the same, apart from the bullish/bearish perspective.

The Three Inside Up pattern forms at the end of a downtrend, often coinciding with a support level. However, it does not necessarily indicate that a reversal is about to happen, it can also precede just a pause or retracement.

The first candle has a large bearish body, while the second, smaller, candle is a bullish spinning top or a Doji, forming a Harami pattern from the two. The smaller candle should close at least at the middle of the previous one’s body.

After that, a third, bullish candlestick breaks upward and closes above the body of the first big, bearish candle. The signal would be even stronger if it closes above the high of the first candle. Here is how it looks.

3. Three Inside

This pattern is considered as one of the most powerful triple candlestick patterns. It is very similar to the Evening and Morning Stars, but it is even stronger, because the middle candle has not even managed to score a new high or low when the opposing counterpart (bears,bulls) fall in control. Moreover, by the beginning of the third period, the new masters are already in complete dominance and have pushed the price even more, compared to the movement in the Evening and Morning Stars, where we needed the third candle to have penetrated 2/3 or 3/4 of the first candle’s height.

Three Outside Up and Three Outside Down

The Three Outside Up and Down are another set of trend-reversal patterns, consisting of three candlesticks, with the Up being the bullish and the Down the bearish one.

The Three Outside Up pattern occurs at market bottoms. Its first candle is a bearish (matching the recent price movement) spinning top, while the second candle is large and bullish and engulfs the first one. You can see it visualized below.

4. Three Outside

Just like the Three Inside Up pattern starts with a Harami, the Three Outside Up begins with an Engulfing. The pattern is then completed with the plotting of a third bullish candle, which closes above the second one and hits a new high thatextends above the Engulfing pattern’s high.

Generally this pattern is considered as less reliable than the rest because outside candles/bars are less predictable and profitable than inside ones, like the Morning and Evening Stars and Three Inside Up and Down. This is because volatility has already risen in the beginning of the pattern (after the first candle) and is susceptible to a contraction much sooner than in the other patterns.

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