Three White Soldiers and Three Black Crows Patterns – Using Them in Crypto Trading

Among the various patterns, the Three White Soldiers and Three Black Crows stand out for their ability to indicate strong trends and potential reversals.

In this article, we'll explore these two candlestick patterns in detail, discuss their significance in the cryptocurrency market, and provide real-world examples to illustrate their effectiveness.

What is The Three White Soldiers Pattern

The Three White Soldiers pattern is a bullish reversal pattern that appears at the end of a downtrend, signaling a potential shift in market sentiment from bearish to bullish. This pattern comprises three consecutive green candlesticks with long bodies. Each candlestick opens within the body of the previous one and closes at a higher price than the previous candle’s close.

This pattern suggests strong buying pressure, indicating that the bulls have taken control of the market from the bears, potentially leading to a sustained upward trend.

Key Characteristics

• Three consecutive green candles: each candlestick should have a long body, indicating strong buying pressure.
• Higher closes: each successive candle should close higher than the previous one, confirming a steady increase in buying momentum.
• Minimal upper wicks: the absence of significant upper wicks suggests that buyers controlled the market throughout the session.

Example

Let's consider a hypothetical example involving Bitcoin (BTC). Suppose BTC has been in a downtrend, and the price has dropped from $50,000 to $45,000. Suddenly, the Three White Soldiers pattern appears on the daily chart. The first candle closes at $46,000, the second at $47,500, and the third at $49,000. This formation indicates a strong bullish sentiment, suggesting that the downtrend may be reversing. 

As a result, traders might consider entering long positions, anticipating further price increases.

What is The Three Black Crows Pattern

The Three Black Crows pattern is the bearish version of the Three White Soldiers. It occurs at the end of an uptrend and consists of three consecutive long-bodied red candlesticks. Each candle opens within the previous candle's body and closes lower than the previous candle's close. 

This pattern indicates strong selling pressure, suggesting that the bears are overpowering the bulls, which could lead to a significant downward trend.

Key Characteristics

• Three consecutive red candles: each candlestick should have a long body, indicating strong selling pressure.
• Lower closes: each successive candle should close lower than the previous one, confirming a steady decline in buying interest.
• Minimal lower wicks: the lack of significant lower wicks suggests that sellers dominated the market throughout the session.

Example

Consider a scenario involving Ethereum (ETH). Suppose ETH has been in an uptrend, and the price has risen from $3,000 to $3,500. Suddenly, the Three Black Crows pattern appears on the daily chart. 

The first candle closes at $3,400, the second at $3,200, and the third at $3,000. This formation signals a strong bearish sentiment, suggesting that the uptrend may be reversing. 

As a result, traders might consider exiting long positions or entering short positions, anticipating further price decreases.

Advantages and Limitations

Both the Three White Soldiers and Three Black Crows patterns are significant because they provide early signals of potential trend reversals. Identifying these patterns in the volatile crypto world can be crucial for making timely decisions and managing risks.

Advantages

• Early reversal indication – these patterns help traders spot potential trend reversals before they become apparent, providing a valuable edge in the market.
• Confirmation of market sentiment – the presence of these patterns confirms a shift in market sentiment, either from bearish to bullish (Three White Soldiers) or bullish to bearish (Three Black Crows).
• High accuracy– while no pattern guarantees a 100% success rate, these patterns are relatively reliable when confirmed by other technical indicators or fundamental analysis.

Limitations

• False signals – like all technical patterns, the Three White Soldiers and Three Black Crows can sometimes give false signals, especially in choppy or low-volume markets.
• Requiring confirmation – It's essential to wait for confirmation before acting on these patterns. Additional indicators, like volume or moving averages, can help validate the pattern's authenticity.
• Market manipulation –  large players (whales) can manipulate prices, leading to false patterns. Traders should be cautious and consider the overall market context.

How to Trade the Three White Soldiers and Three Black Crows Patterns

To effectively trade using the Three White Soldiers and Three Black Crows patterns, follow these steps:

1. Identify the pattern

Look for the pattern in the price charts. Ensure that the three consecutive candles meet the criteria mentioned above.

2. Wait for confirmation

Don't rush into a trade immediately after spotting the pattern. Wait for additional confirmation, such as a breakout above resistance (for Three White Soldiers) or below support (for Three Black Crows).

3. Use Stop-Loss orders

Given the volatile nature of the crypto market, it's crucial to set stop-loss orders to manage risk. Place your stop-loss just below the low of the Three White Soldiers pattern or just above the high of the Three Black Crows pattern.

4. Monitor volume

Volume can serve as a strong confirmation signal. A pattern accompanied by high volume is generally more reliable than one with low volume.

5. Use an exit strategy

Have a clear exit strategy in place. This could be based on a specific price target, trailing stop, or reversal pattern.

Trading Tips for Three White Soldiers

When entering the market, many traders use the closing price of the third candle as their entry point. If you’re willing to take more risks, you can set your entry at the lowest point of the first candle, while more cautious traders might opt for a safer, closer entry.

For take-profit strategies, it's wise to use support and resistance levels to identify where the price has previously stalled. Consider locking in profits at key levels or when signs of trend fatigue appear. Aiming for a risk-to-reward ratio of 2:1 is often a prudent choice.

If you've been riding the ongoing downtrend, the price reversal signaled by this pattern can be an excellent exit opportunity.

The significant upward move following the Three White Soldiers pattern often results in an overbought market. In such cases, technical indicators can offer deeper insights. For instance, if the stochastic oscillator exceeds 80, it may indicate overbought conditions. The price may then enter a consolidation phase, allowing the stochastic oscillator to reset.

Trading Tips for Three Black Crows

When considering a short position, look for confirmation of bearish conditions as the third candlestick closes. Indicators such as increasing volume on the third candle or a break below the pattern's low can signal a good entry point. Set your stop loss just above the pattern's high to manage risk.

For potential targets, focus on support levels, and recent swing lows, or use the pattern's height (from high to low) to estimate a projected downside move. Utilize trailing stops to secure profits as the market trends in your favor.

As with any candlestick pattern, it's crucial to confirm the Three Black Crows signal with other technical analysis tools, such as trend line breaks or momentum indicators.

Key Takeaways

The Three White Soldiers and Three Black Crows candlestick patterns are invaluable tools for crypto traders, offering early indications of trend reversals. While they provide a significant edge, it's essential to use them alongside other technical indicators and fundamental analysis for a comprehensive trading strategy. 

Knowing how to apply and trade these patterns will enhance your ability to predict market movements and make strategic trading choices.