Understanding the Three Black Crows Pattern and Trading Strategy

black hoodie pattern Candlestick patterns are a key technical tool traders need to understand the price movements of securities. Candlestick charts are most commonly used by traders. Candlesticks consist of the opening, closing, high, and low prices of a security over a specific period of time.

Among the various candlestick patterns that exist today, one of the most valuable candlestick patterns is the “Three Black Crows.” In this article, we will understand the three black crow patterns, their characteristics and strategies through charts.

What is the three black crows pattern?

The Three Black Crows is a multiple candlestick pattern that signals a price reversal towards a security’s downtrend. It consists of three consecutive bearish long candles, with the opening price of each candle being lower than the opening price of the previous candle.

The Three Black Crows pattern is a bearish reversal pattern that should be strongly considered when formed after an uptrend. The pattern formation indicates weakness in the trend and signals the emergence of a potential downtrend.

The meaning of the three black crows pattern

The pattern formation means that the bulls were strong and won, but now the bears have taken control and are pushing the price lower as security. A downtrend for three consecutive sessions creates a new lower candle, indicating a strong trend reversal.

A continuation of this downtrend signals the strength of the bears, and you can capitalize on the downtrend sentiment and initiate a sell position. The three candles look like bearish moruboz. It is a candlestick pattern formed by a long candle (red) with a high opening price and a low closing price. This indicates bearish momentum for the security.

Identifying three black crows

• The dominant trend must be an upward trend.
• Three consecutive bearish candles must be formed in a row.
• Each candle in the pattern must open at a lower price than the previous candle.
• Each candle should close progressively lower to create a new low.
• The three candles may have small or no wicks.

Three Black Crows Trading Strategy

Let’s take a look at some trading strategies you can use to better understand the Three Black Crows pattern formation.

bearish reversal

When the three black crows pattern forms during a strong uptrend, it signifies the end of the bullish trend. This could signal a reversal and enter a sell position.

entry:- Enter a security selling position at the closing price of the third candle of the formed pattern.

Stop Loss:- The stop loss on the pattern is simple, and the high price of the formed pattern can be set as a stop loss for a good risk reward.

Profit Target:- This pattern has the potential for high risk to reward trades where the minimum target is the first support level.

Chart of Infosys Ltd showing the formation of the Three Black Crows pattern.

trend reversal

Pattern formations help traders find technical exits for long positions placed on a security. Finding the entrance is most important, but the exit is also very important.

When the three black crows pattern forms after a strong uptrend, it signals a reversal of the previous trend.

Therefore, traders prefer to close out existing long positions by confirming the formation of the Three Black Crows pattern.

Traders can also use different strategies to identify pattern formations to spot trend reversals.

three black crows with moving averages

The Three Black Crows pattern is combined with a short-term moving average as a confirmation to prevent false signals generated by the pattern. When the price of a security forms three black crows, it signals a reversal. Since we know we can enter a sell position, we apply a moving average to confirm our entry.

If the price closes below the moving average, you can take a sell position for a good risk vs. reward trade with double confirmation of the pattern and the moving average. Looking at the chart below, we can see that the chart of Reliance Industries confirms a downtrend with a pattern forming and the price is below the 5 EMA.

Chart of Reliance Industries showing a combination of patterns and moving averages.

The limits of three black crows

The Three Black Crows is a powerful reversal signal, but it is unreliable and traders must be aware of its limitations.

• If the pattern flops, the potential for loss is high because the stop loss is higher than the pattern.
• The effectiveness of patterns can vary depending on market conditions and are more reliable in trending markets than range-bound markets.
• Forming patterns on daily, weekly, and monthly timescales is expensive to trade.
• This pattern can be entered late because it forms three consecutive sessions (or candles).

Finishing

The three black crows are a powerful tool for traders to identify potential bearish reversals in a security. Understanding its formations, strategies, and limitations helps traders make informed trading decisions.

As a trader, it is always preferable to use patterns along with other technical tools to avoid false signals. A good risk reward ratio and proper risk management through backtesting can help traders be profitable in the long run.

Written by Deepak M

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