There are a number of ways in which you can spot a trend reversal in the stock markets. One such way that would help us in identifying trend reversals would be the formation of candlestick patterns. In this article, we are going to be discussing one of the many bearish trend-reversal patterns. And we are talking about the three black crows pattern.
What Is The Three Black Crows Candlestick Pattern?
Three Crows pattern is a multiple candlestick chart pattern that is used to predict reversal to the downtrend.
This candlestick pattern is formed when the bearish forces come into action and make the prices fall for three consecutive days.
Traders should take a short position after this bearish candlestick pattern is formed.
Traders can also take the help of volume and technical indicators to confirm the formation of this candlestick pattern.
How To Trade With This Three Black Crows Pattern?
The first candlestick of this pattern should be a long-bodied bearish candlestick and must be formed at the high of an uptrend.
A bearish candle means that the closing price should be lower than the opening price as the bears are trying to make the prices fall.
The second candlestick should also be a bearish candle. It can be long or short-bodied.
The opening price of this candlestick should lie within the real body of the first candlestick i.e should be in between the midpoint or the closing of the first candle.
The second candle should not break the high of the first candlestick.
The third candlestick should also be a bearish candle. It can either be a long or short-bodied candle.
The opening price of this candlestick should lie within the real body of the second candlestick i.e should be the midpoint or the closing of the second candle.
The third candle should not break the high of the second candlestick.
Example Of How To Use Three Black Crows
As a visual pattern, it’s best to use three black crows as a sign to seek confirmation from other technical indicators. The three black crows pattern and the confidence a trader can put into it depends a lot on how well-formed the pattern appears.
The three black crows should ideally be relatively long-bodied bearish candlesticks that close at or near the low price for the period. In other words, the candlesticks should have long, real bodies and short, or nonexistent, shadows.
If the shadows are stretching out, then it may simply indicate a minor shift in momentum between the bulls and bears before the uptrend reasserts itself.
Volume can make the three black crows pattern more accurate. Volume during the uptrend leading up to the pattern is relatively low, while the three-day black crow pattern comes with relatively high volume during the
sessions. In this scenario, the uptrend was established by a small group of bulls and then reversed by a larger group of bears.
Of course, with markets being what they are that could also mean a large number of small bullish traders running into a smaller group of large-volume bearish trades.
The actual number of market participants matters less than the volume each is bringing to the table.
Limitations Of Using Three Black Crows
If the three black crows pattern involves a significant move lower, traders should be wary of oversold conditions that could lead to consolidation before a further move lower.
The best way to assess the oversold nature of a stock or other asset is by looking at technical indicators, such as the relative strength index (RSI), where a reading below 30.0 indicates oversold conditions or the stochastic oscillator indicator that shows the momentum of the movement.
Many traders typically look at other chart patterns or technical indicators to confirm a breakdown, rather than using the three black crows pattern exclusively. As a visual pattern, it is open to some interpretation such as what is an appropriately short shadow.
Also, other indicators will mirror a true three black crows pattern.
For example, a three black crows pattern may involve a breakdown from key support levels, which could independently predict the beginning of an intermediate-term downtrend.
The use of additional patterns and indicators increases the likelihood of a successful trade or exit strategy.
Three black crows are one of the many candlestick patterns that can help you in identifying trend reversals. This pattern must be used in conjunction with other technical indicators for higher accuracy.
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