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What Are Three White Soldiers?
Three White Soldiers is a bullish Japanese candlestick reversal pattern consisting of three consecutive white bodies, each with a higher close.
The Three White Soldiers candlestick pattern marches upward, creating a ladder-like structure as price climbs higher. The pattern usually indicates weakness in an established downtrend and the potential for an uptrend to emerge. Each candle should open within the body of the previous candle and the close should be near the high of the candle.
Characteristics of Three White Soldiers
The three white soldiers is a bullish reversal pattern that occurs in a strong downtrend and signals a change in direction. The formation consists of three consecutive bullish candles, with each candle closing higher than the previous candle.Since it consists of three candles, this pattern almost automatically confirms that a reversal is taking place now, as there is considerable bullish power behind the formation of this pattern. As seen in the illustration below, the three white soldiers appear after a strong downtrend that usually ends with a new short-term low being printed.Complete Candlestick Patterns: Bullish, Bearish, and Continuation Patterns
The opposite pattern to the three white soldiers is called the three black crows. This is a bearish reversal formation that occurs near the top of the current uptrend, as it produces a reversal signal. Like the bullish formation, the three black crows consist of three consecutive bearish candles, preferably with long bodies, which make the price action lower as each candle pushes further down.
How to Identify the Three White Soldiers
Before you can correctly identify the three white soldiers, you need to know that not all of these patterns are tradeable. There are several requirements that the three white soldiers pattern must meet.To qualify each example of the three white soldiers candlestick, traders should look to incorporate a three-step process into their trading:
- Market context — pattern needs to develop at the end of a bear market
- Candle size — the three green candles should be large
- Volume confirmation — an increase in trading volume must be present to confirm a trend reversal.
Market Context
As mentioned earlier, proper context is a dealbreaker for most candlestick patterns. In other words, the three white soldiers must form at the end of a downtrend or near a major support level. For example, if the pattern forms within a consolidation, it is less reliable as a trend reversal signal. Second, profit margins are slim when you trade in a ranging market because the pattern will soon reach a resistance level. Essentially, traders must first identify a downtrend before the three white soldiers can “come to the rescue” when buyers overpower sellers.Candle Size
The second requirement for the three white soldiers is that you need all three candlesticks to be thick. Ideally, we want the candlestick to be larger than the other candlesticks around it. Also, the second candlestick cannot go beyond the previous day’s mid-price range. The same goes for the last candlestick. This basically shows that there is little to no selling pressure.When three green candles close near the top of the candlestick, it signals that the bulls have been in control of the market throughout the session that day.
Volume Confirmation
Last but not least, the three white soldiers should also be supported by increasing volume. Volume is a leading indicator that can be used to confirm a price reversal. Without increasing volume, this may just be a bull trap that you want to avoid. If the three white soldiers are accompanied by light volume, it means there is no institutional buying. In short, traders need to make sure there is increasing volume to validate the strength of the bulls.How to Use the Three White Soldiers to Identify Entry and Exit Points
There are different ways to trade the three white soldiers pattern. Typically, there are two approaches that anyone can use:- A buy position is opened when the high of the three green candles is broken, or
- Buying pullbacks
For example, the stochastic oscillator may have moved above 80, indicating an overbought reading. In this situation, the price trend is in consolidation, giving the stochastic oscillator time to reset. This is a great opportunity to buy on a pullback.
Real Case Example
The daily chart for Bitcoin (BTC/USD) printed the following three white soldiers candlestick pattern in February 2021 after a several-day sell-off. In this example, the prevailing trend was down before the three white soldiers candlestick pattern led the price to a sharp bullish reversal.
The bullish reversal pattern was confirmed after the highs of all three candles had broken above. Additionally, the stochastic oscillator revealed oversold conditions for Bitcoin, warning traders of an imminent price reversal. As you can see, the price action itself — combined with the right context and other factors that could support a bullish case scenario — has led to the success of this long position.
Risk Management with Three White Soldiers is
Managing risk, especially in the volatile cryptocurrency market, will help many traders keep their heads above water where others have failed. As a rule of thumb, never risk more than 2% of your portfolio in any given setup. Stop losses tend to be wider with the three white soldiers pattern. If you risk more than you can afford to lose, you will be hit harder if the market goes against your position. Second, make sure that the candlestick pattern offers a risk-to-reward ratio of at least 1:2. In other words, the rewards tend to outweigh the risks.
