As forex traders, we usually fret the thought of a bear market or a bearish trend. But if detected at the right time, even a market downfall can provide a great opportunity for executing some top notch trades – or at least to stave off heavy losses!
The three black crows pattern is one of those signals that can help you in the detection of a bearish trend reversal in the market. In fact, this candlestick pattern is regarded by almost all market experts as one of the most powerful bearish signals.
This pattern is made from three long and promising red candles that bring news of bearish days ahead!
Being a bearish reversal signal, the three black crows pattern is normally seen when there is already an uptrend in the market, since it is a sign that the uptrend is losing its strength and nearing its demise.
Forex traders can use this candlestick pattern to their advantage, so keep reading this article to find out everything about the three black crows, its structure, interpretation, and application in the market.
The Definition of the Three Black Crows
Being a triple candle pattern, the Three Black Crows consists of three candlesticks. In the candlestick charting approach, each candle represents the price movements that are recorded in one day of trading. So it would take three days for the Three Black Crows to take full form.
This chart pattern is a bearish reversal sign, so it means when traders detect it, they can expect a downtrend to follow soon. As we mentioned at the beginning, the idea of a bear market is not a pleasant one for any trader in any financial market; but if it is identified correctly and at the right time, even a serious fall in prices can provide a chance for a savvy trader.
In the following sections, we will discuss how this candlestick pattern exactly looks like, and also how you can properly identify and interpret it.
Structural Criteria for the Three Black Crows
The first and major factor in the structure of the Three Black Crows pattern can be found in its name. Yes, there are indeed three candles in the formation of this pattern.
These three candles are all red, or black (otherwise known as filled). In either form of representation by different sources, a red candle is a bearish candle, which means the candle closes much lower than it opens.
When the closing price of a candle is lower than its opening price, the body of the candle becomes red. The wicks or shadows of the candle do not play that much of an important role in this case.
Another major factor in the structure of the Three Black Crows is that the bodies of the candles ought to be long. This means the fall in the prices should be substantial. This is seen in the long body of the red candle, or the great gap that is between the open and close price on the negative side.
Lastly, the three red candles are not just placed next to one another in any manner. They do have a specific placement order and distance.
Each candle must stand lower than the previous candle. So the candles do represent a descending order. The way this is obtained is when the opening price of the new candle is lower than the closing price of the previous candle.
So this is how three long red candles are recorded in three days to form the Three Black Crows.
How to Identify and Interpret the Three Black Crows?
The way you can identify the Three Black Crows can be found in its structure discussed above. We outlined certain details that this pattern needs to follow in order to be what it is.
Therefore, when it comes to the identification of this pattern, make sure to look out for these details.
First of all, there needs to be three red candles. And also remember that the candles need to be long.
What is that important?
When the red candles are long it means there was a substantial decrease in the price compared to the opening price, and not just a nominal drop.
And remember that the candlesticks must be in descending order, which is yet another sign that the prices are indeed falling further and further.
Other than the structural signs that you can use for the identification of the Three Black Crows pattern, there is another factor to keep in mind – trading volume.
In general, volume is a good metric for the confirmation of previously obtained analyses. In the case of a bearish signal, a falling trading volume can be a good sign that the traders in the market are indeed losing their positive sentiment toward the market.
All the above mentioned details can be used in the interpretation of the pattern as well. The whole long bearish candles one after the other, the descending order of the candles themselves, and the final confirmation by the falling trading volume, all the evidence points to the weakening of the existing uptrend.
The Three Black Crows pattern is the signal that the uptrend is near its end. In fact, as we said, it is a strong signal of its kind.
At the same time, if this candlestick pattern is seen when there is already a bearish trend in the market, it can be taken as yet another strong signal but this time in favor of the existing trend – i.e. being a continuation signal.
Three Black Crows: Trade the Downfall!
There are three situations in which you can possibly find the Three Black Crows pattern on the candlestick chart. In each case the way you can implement this pattern is different. So let’s discuss each one separately.
- During an uptrend: this is the main place of formation for the Three Black Crows pattern. Of course, when seen during an uptrend, this pattern can be taken as a bearish reversal. Therefore, you can opt to open up short positions in order to manage the risks associated with the falling prices.
- During a downtrend: on the other hand, when a Three Black Crows pattern is seen while there is an ongoing downtrend in the market, it can be taken as a continuation signal. One that tells the forex trader, the downtrend or the bearish trend will keep going for the foreseeable future.
- During a sideways trend: lastly, there are those situations when the market is moving sideways. This means there is yet for a specific trend to form. When such candlestick patterns are formed during a sideways trend, that is when it does not provide much valuable information for the trader. In fact, this can be considered as one of the constraints of this pattern. So be weary of this.
Three Black Crows vs. Three White Soldiers
In the end, we would be remiss not to mention the twin sibling of the Three Black Crows, which is called the Three White Soldiers. These two types of candlestick patterns are the exact opposite of each other. So while the Three Black Crows is a strong bearish reversal signal, the Three White Soldiers pattern provides a powerful bullish trend reversal.
The Three Black Crows is a potent candlestick pattern that is a bearish trend reversal signal. As a result, it would normally be detected when there is a bearish trend in the market. This pattern has three long bearish or red candles in its structure that stand lower one after the other, forming a descending order.