The Bullish and Bearish Three Line Strikes – How to Use Them in Crypto Trading

Among the various candlestick patterns that traders use to make informed decisions, the Bullish and Bearish Three Line Strike patterns stand out for their reliability in predicting market trends. These rare yet powerful candlestick formations offer traders a glimpse into the future direction of price movements, providing a competitive edge in the highly volatile crypto market. 

Read below to find out more about these patterns, explore how they work, why they're significant, and how you can use them to enhance your trading strategy.

What is the Bullish Three Line Strike Pattern?

The Bullish Three Line Strike pattern is a rare but powerful bullish reversal pattern. It occurs at the end of a downtrend and consists of four candlesticks:

• Three consecutive bearish candles – indicate a prevailing downtrend. Each candle closes lower than the previous one, reinforcing the bearish sentiment.
• Fourth bullish candle – this candle opens lower than the third candle but closes above the opening of the first bearish candle, effectively engulfing all three previous candles.

The appearance of the fourth bullish candle signifies a strong buying interest, suggesting that the downtrend may be reversing. The pattern is considered complete when the fourth candle closes above the open of the first bearish candle.

This pattern is considered a bullish continuation pattern because it indicates that despite the bearish 'strike,' the overall market sentiment remains positive, and the uptrend is likely to continue. 

What is the Bearish Three Line Strike Pattern?

Conversely, the Bearish Three Line Strike pattern is a bearish reversal pattern that occurs after an uptrend. 

This pattern is considered a bearish continuation pattern because it suggests that despite the bullish 'strike,' the overall market sentiment remains negative, and the downtrend is likely to continue. Traders often look for this pattern as a confirmation of a sustained downtrend.

It also consists of four candlesticks:

• Three consecutive bullish candles – these indicate a prevailing uptrend, with each candle closing higher than the previous one.
• Fourth bearish candle – this candle opens higher than the third candle but closes below the opening of the first bullish candle, engulfing the prior three candles.

The emergence of the fourth bearish candle suggests a potential reversal of the uptrend, as it indicates a strong selling interest. The pattern is confirmed when the fourth candle closes below the open of the first bullish candle.

Importance of Volume in Confirmation

While the Bullish and Bearish Three Line Strike patterns can provide valuable signals, they are more reliable when confirmed by trading volume. A high trading volume accompanying the fourth candle indicates strong participation by traders, reinforcing the likelihood of a trend reversal. Conversely, low volume may suggest a lack of conviction, potentially leading to a false signal.

Examples

Bullish Three Line Strike in Bitcoin (BTC)

In February 2022, Bitcoin experienced a notable Bullish Three Line Strike pattern. After a prolonged downtrend, three consecutive bearish candles were followed by a large bullish candle. This fourth candle opened lower than the third but closed above the opening of the first bearish candle, signaling a potential reversal. 

The pattern was accompanied by a significant increase in trading volume, further validating the bullish signal. Following this pattern, Bitcoin's price surged over the next week, demonstrating the pattern's predictive power.

Strategies for Trading the Three Line Strike Patterns

Entry and exit points

For the Bullish Three Line Strike, traders can enter a long position when the fourth bullish candle closes above the open of the first bearish candle. A stop-loss can be set below the low of the fourth candle to manage risk.

In the case of the Bearish Three Line Strike, traders can enter a short position when the fourth bearish candle closes below the open of the first bullish candle. A stop-loss can be placed above the high of the fourth candle.

Risk management

Due to the inherent volatility of the crypto market, it's crucial to employ risk management techniques. This includes setting appropriate stop-loss levels, position sizing, and avoiding over-leveraging.

Lock in potential gains by establishing profit targets according to your desired risk and reward ratio. These targets can be set at the next key support or resistance levels or determined using technical indicators like Fibonacci retracement levels.

Combine with other indicators

You can enhance the reliability of the Three Line Strike patterns by combining them with other technical indicators, like the Relative Strength Index (RSI), Moving Averages, or Bollinger Bands. These indicators can provide additional confirmation and help filter out false signals.

Analyze multiple time frames

Boost the significance and potential impact of the pattern by matching it with crucial support or resistance levels on larger timeframes. When using multi-timeframe analysis, you can get a more thorough perspective on market trends, helping you forecast future price action more accurately.

Advantages and Limitations of the Three Line Strike Patterns

Advantages

Clear continuation signals – the bullish and bearish three line strike patterns are four-candle formations that indicate either a bullish or a bearish continuation. They generally appear during an ongoing uptrend or downtrend, suggesting that either the positive or negative momentum is expected to persist.

Easy to spot on the chart – unlike some complex technical indicators, the Three Line Strike patterns are straightforward to spot on candlestick charts. Their simplicity makes them accessible to both novice and experienced traders, allowing for quick analysis and decision-making.

Historical reliability – traders regard these patterns as reliable indicators due to their historical effectiveness in predicting trend continuations. When the pattern is confirmed, it often leads to substantial price movements, offering profitable trading opportunities.

Limitations

Rare occurrence – the Bullish and Bearish Three Line Strike patterns are relatively rare, which can limit their applicability for frequent trading decisions. Traders relying solely on these patterns may find themselves waiting long periods for a valid signal, potentially missing other profitable opportunities.

Can provide false signals – with the crypto market known for its high volatility, these patterns can sometimes lead to false signals. Price swings can cause the formation of these patterns without a true reversal, leading traders to make erroneous decisions.

Dependent on volume for confirmation – while trading volume can confirm the validity of these patterns, it can sometimes be unreliable in the cryptocurrency market, especially for lesser-known or low-cap coins. Thin trading volumes may not provide a clear confirmation, increasing the risk of misinterpreting the pattern.

Limited predictive power – the Three Line Strike patterns provide limited insight into the strength and duration of the subsequent trend. While they can signal a potential reversal, they don’t indicate how strong or long-lasting the new trend will be, making it challenging to determine optimal entry and exit points solely based on these patterns. This limitation requires additional technical analysis tools and indicators for more comprehensive decision-making.

Key Takeaways

The Bullish and Bearish Three Line Strike patterns offer valuable insights into potential market reversals, making them essential tools for crypto traders. 

Keep in mind that before entering a trade using these patterns, you should first identify the overall trend.  If the pattern confirms a downtrend, that usually means you can consider a sell position. If the pattern confirms an uptrend, you should consider an opportunity to go long. 

However, like all technical analysis tools, these patterns should be used with caution and combined with other indicators to increase their reliability. Successful trading isn’t just about recognizing patterns; it's about understanding the market context, managing risk, and maintaining discipline in your trading approach.