In technical analysis, some of the most commonly used price action patterns have very funny names like “Three White Soldiers.” However, the names of these patterns are not random but rather illustrate the general pattern of the candlesticks or bars that are formed by the price action.
In that regard, the Three White Soldiers pattern name originated from the shape of the price action that resembles a regular ascending army formation.
In this article, we shall look at what defines the Three White Soldiers pattern, how to identify it, how to use it to trade, and what its limitations are.
What is the Three White Soldiers pattern?
Firstly, the Three White Soldiers pattern is a bullish reversal pattern. When it forms, it signals an oncoming upward reversal, meaning that it forms at the end of a bearish trend or retracement.
The Three White Soldiers pattern consists of three bullish candlesticks or bars (depending on what you have chosen to use on your trading chart). Each of the three candlesticks or bars closes progressively higher than the previous, meaning the close of the third candlestick is way above the first.
Its formation signals the presence of a strong buying pressure.
The reverse of the Three White Soldiers is called the Three Black Crows and it forms at the end of a bullish trend and signals an upcoming bearish reversal.
How to Identify the Three White Soldiers
It is not hard to identify the Three White Soldiers pattern on your chart since the pattern is very straightforward. All that you are required to at is how the candlesticks form and if they are closing progressively higher than the previous candlesticks.
Market Context
When doing technical analysis, you should look for three consecutive bullish candlesticks that open and close progressively higher than each other. In most cases, they form when the market is oversold at the end of a bearish trend.
Since the pattern is formed at the bottom of a bearish trend, you could use an indicator like the RSI or stochastic indicator to identify when the market is oversold to help you in identifying when to expect the Three White Soldiers could be formed.
Candle size
The candlesticks should have big bodies and small wicks. At times they may not have any wicks at all.
Volume confirmation
In most cases, when a Three White Soldiers pattern forms, there is also a surge in the trading volume; something that confirms that there is a trend reversal.
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How to trade when you see the Three White Soldiers pattern
As mentioned above, the Three White Soldiers pattern shows a bullish reversal meaning that a previous bearish trend has come to an end due to a steady advance of buying pressure.
If you had opened a short position (sell order) and you identified a Three White Soldiers pattern, you should close the position.
You should then confirm the signal using several technical indicators like the stochastic oscillator indicator or the relative strength index (RSI) to ensure that the market trend has changed.
If a bullish trend is confirmed, you can then go ahead and open a long position (buy order).
You should however ensure to use some risk management tactics like not risking more than 2% of your portfolio in any given position/trade. Secondly, you should use a stop loss for every trade that you place.
The stop loss level should tend to be wider when you identify the Three White Soldiers pattern since it is placed at the close of the last bearish candlestick while the entry point (the level at which you open your trade/position is three candlesticks higher.
You should ensure that the stop loss level gives you a 1:2 reward ratio which means the take profit should be placed at a level that would give you twice the amount that you could lose if the stop loss was hit.
Limitations of Using Three White Soldiers
Since in technical analysis there is no perfect candlestick pattern, the Three White Soldiers also come with its limitations. In essence, even if you use the same pattern every time, you will find yourself making some losses, though for a trading pattern to be good it should enable you to make more profits than losses.
The first limitation of using the Three White Soldiers is that it requires a lot of courage since normally one would fear to place a buy immediately after a strong bear market since you may not be sure whether the market has reversed from a bearish trend to a bullish trend.
Many traders avoid trading trend reversals since there is always the risk of the reversal being too weak or overcome by the previously prevailing conditions. At times, the market could change course due to some minor market news but after the effect of the news fades away, the market continues on its original trend; something that would mean huge losses if you had placed a trade thinking that it was a strong trend reversal.
Secondly, since the stop loss is placed below the first of the three candlesticks making the Three White Soldiers pattern, the stop loss is wide and if the market goes against your trade, you could end up making a large loss.
On the brighter side, to hedge against the above limitations of the Three White Soldiers pattern, you should use other technical indicators to confirm that the trend reversal that the pattern signals are real.