The Three Black Crows is a term used in the world of technical analysis to describe a bearish candlestick pattern, which may indicate a potential reversal of an existing uptrend.
Candlestick charts are utilized to represent the day's opening, high, low, and closing prices for a particular asset. When the asset's price moves higher, the candlestick appears white or green, while a price drop results in a black or red candlestick.
The Three Black Crows pattern comprises three consecutive, long-bodied candlesticks that open within the real body of the preceding candle and close below it. Many traders employ this indicator alongside other technical indicators or chart patterns to confirm the likelihood of a trend reversal.
The Three Black Crows is a visual pattern, meaning that there are no specific calculations required to identify this indicator. The pattern emerges when bears gain control over the bulls during three successive trading sessions. On price charts, the pattern appears as three bearish, long-bodied candlesticks with short or nonexistent shadows or wicks.
In a typical Three Black Crows occurrence, the bulls begin the session with the price opening slightly higher than the previous close. However, the price is pushed lower throughout the session and ultimately closes near the session low due to pressure from the bears. This trading action results in a very short or nonexistent shadow. Traders often interpret this sustained downward pressure over three sessions as the beginning of a bearish downtrend.
As a visual pattern, it's best to use the Three Black Crows as a signal to seek confirmation from other technical indicators. The pattern's reliability and the confidence a trader can have in it largely depend on how well-formed the pattern appears.
Ideally, the Three Black Crows should 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, 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. The volume during the uptrend leading up to the pattern should be relatively low, while the three-day black crow pattern should come with a relatively high volume during the sessions. In this scenario, a small group of bulls established the uptrend, which was then reversed by a larger group of bears.
However, this could also mean a large number of small bullish traders encountering a smaller group of large-volume bearish trades. The actual number of market participants is less important than the volume each brings to the table.
The Three White Soldiers pattern is the opposite of the Three Black Crows pattern. It occurs at the end of a bearish downtrend and predicts a potential reversal higher. This pattern appears as three long-bodied white candlesticks with short, or ideally nonexistent, shadows. The open occurs within the previous candlestick's real body, and the close occurs above the previous candlestick's close.
Three White Soldiers indicate the reversal of a downtrend, while Three Black Crows signify the reversal of an uptrend. The same caveats apply to both patterns regarding volume and confirmation from other indicators.
If the Three Black Crows pattern involves a significant move lower, traders should be cautious 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 examining 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 examine other chart patterns or technical indicators to confirm a breakdown rather than relying solely on the Three Black Crows pattern. As a visual pattern, it is open to some interpretation, such as determining an appropriately short shadow.
Additionally, 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.
In the third week of May 2018, a Three Black Crows pattern appeared on the GBP/USD weekly price chart, representing an ominous sign for the currency pairing. Analysts speculated that the Three Black Crows pattern indicated that the pairing would continue to trend lower. Three factors were analyzed to determine that the Three Black Crows pattern signaled a continuing downturn:
the Three Black Crows candlestick pattern is a valuable tool for traders to predict potential trend reversals. However, it's crucial to combine this pattern with other technical indicators and chart patterns to increase the likelihood of a successful trade.
By understanding the limitations of the Three Black Crows pattern and using it alongside other indicators, traders can make informed decisions and develop effective trading strategies.
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