Three White Soldiers | Finschool By 5paisa (2024)

The three white soldiers candlestick pattern is typically observed as a reversal indicator after a period of price decline. The chart pattern suggests a strong change in the market sentiments in terms of the stock commodity or forex pair making up the price action on the chart. The bullish candle closes with small or no shadows it indicates the bulls have managed to keep the price at the top of the range for the session. This candlestick pattern is formed after a long downtrend when the bullish forces are more than the bearish forces for consecutive days. This pattern consists of three candlestick pattern that are green in colour.

What are the conditions fulfilling Three White Candlestick Pattern??

There are some of the conditions that needs to be fulfilled for identifying the candlestick pattern

Condition 1:

The first candle seems like the continuation of the downtrend. It is a bullish candlestick pattern where the closing price should be more than the opening price and indicates that the bulls are back in to the action.

Condition 2:

The opening price should be within the real body of the first candlestick most preferably between the midpoint and closing price of the previous candlestick.

Condition 3:

The third candlestick should be a bullish candlestick having no or small shadow. The opening price should be within the real body of the second candlestick and between the midpoint and closing price of the second candlestick.

How to Identify the three white soldiers pattern?

To identify the three white soldiers pattern, the trader must look for three consecutive green or white candlesticks. Each one must progressively be higher than the first and the candlesticks should have big bodies and very small wicks. The three white soldiers means that there is steady advance of buying pressure following a downtrend. Bullish Patterns like these often signal a reversal a price movement. Some traders consider opening a long position to profit from any upward trajectory when they see the three white soldiers pattern.

How to trade when you see the three white soldier pattern??

• The three white soldiers is a reliable entry and exit signal. Traders who are short in the market exit the market as soon as the three bullish candlesticks appear, indicating that momentum is shifting to the upside. Their appearance affirms that the momentum has changed from bearish to bullish. Consequently, it would not make sense to remain bearish as the price is likely to increase.
• Similarly, bulls on the fence, as the price was moving lower, interpret the three white soldiers as a buy signal as the trend reverses from a downtrend to an uptrend. Consequently, they use the opportunity to eye buy positions as the price is likely to move up with a buildup in buying pressure.
• While the pattern provides reliable entry and exit signals, it is essential to use other indicators to confirm the same. Consequently, technical analysts rely on momentum indicators to ascertain whether the momentum has changed from bearish to bullish.
• The Relative Strength Index (RSI) is one indicator commonly used alongside the three white soldiers candlestick patterns. The indicator has readings between 0 and 100. When its readings are below 30, it implies oversold conditions, and readings above 70 imply overbought conditions. Therefore, while analyzing the three white soldiers, the RSI being below 30 is of utmost importance as it provides an early signal of potential price reversal.
• Consequently, when the RSI readings start moving up from below the 30 levels as the three white soldiers emerge, it affirms the momentum shift from the downside to the upside. The RSI closing above the 50 levels affirms that the market has changed from bearish to bullish and that price will likely continue increasing.
• When trading the candlestick pattern, it is essential to note that a strong move up could result in a temporary overbought condition. For instance, when the RSI moves above 70 levels, it implies that the market is overbought. Therefore, while the price can continue moving higher in mid-overbought conditions, caution is of utmost importance.
• The likelihood of the price starting to move lower after the overbought conditions are met is usually high. However, in this case, the pullback might be small before the price moves higher in continuation of the emerging uptrend.

Limitations

• One of the biggest limitations of three white soldiers is that it can occur during periods of price consolidation after a strong move lower. In this case, the price might appear to have reversed course and start to move up only to reverse course and move lower in continuation of the long-term downtrend.
• It is important to watch volume to avoid being trapped on price reversing course from the emerging uptrend and start moving lower. Once the three white soldiers’ candlestick occurs, they should be accompanied by strong volume affirming a buildup in buying pressure. Suppose the pattern occurs in a level of strong resistance and low volume. In that case, it is important to wait for further confirmation as the price’s likelihood of lower prices is usually high.
• If the volume is low, it simply implies that short sellers are only taking profits and that price is likely to decrease once it bounces up significantly. The bounce back often allows short sellers to enter new positions at the new highs.
• In addition, it is important to use the pattern to make a trading decision in combination with other technical indicators. The indicator should never be used in isolation. For instance, the relative strength index will provide valuable information on whether the price is likely to continue moving up once the patterns occur. If the RSI struggles to move above the 50 levels, it simply implies the momentum is still bearish and that price will likely continue moving lower.

Conclusion

• Three white soldier patterns is a bullish candlestick pattern that consists of three bullish candlesticks that close progressively above each other, resulting in a staircase-like structure. The pattern occurs at the bottom of a downtrend as the price hits a strong support level and bearish momentum wanes. The appearance of the pattern affirms a steady increase in buying pressure as bears exit, affirming an upcoming price reversal.
• While the three white soldiers is not common in charts, it is a more reliable pattern as the reversals that occur hold 80% of the time, allowing traders to profit from an emerging uptrend. In addition, the pattern provides accurate results when used with other technical indicators such as the relative strength index and stochastic and moving averages.