When we think about candlesticks, many of us will focus on the obvious ones, like dojis or hammers or haramis.
But these aren’t necessarily the most useful candlesticks to know about.
A rather ominous candlestick pattern… with a 78% success rate!
So today, I’d like to look at a workhorse candlestick pattern that is a high-scorer in success terms.
According to candlestick guru, Thomas Bulkowski, this pattern has a success rate of 78%.
It’s also one that’s lurking ominously on the European indices this morning …
The pattern I’m talking about is called Three Black Crows.
And – as the name suggests – it’s not a positive sign for the markets.
Three black crows are three decent-sized black or red candlesticks in succession, with each opening within the body of the previous candle, and closing below the previous candle.
The opposite of three black crows are three white soldiers …
Three white soldiers are the same pattern in reverse, so we have three successive up candles.
It’s important to note that three black crows forms in an uptrend or within an upward “bounce” in a long-term downtrend.
Likewise, three white soldiers forms in a downtrend or within a downward “bounce” in a long-term uptrend.
And each signals a reversal.
A reversal signal
So, let’s take a closer look at what’s going on with our black crows …
Assuming that we’re looking at daily candles, we can see that each day is opening higher than the close of the previous day, which implies some optimism in the markets.
However, buyers are clearly losing strength, and the lack of much in the way of a lower wick shows that they’re failing to make much of a comeback during the day’s trading.
Here we can see three black crows in action …
The three red candlesticks suggest that the bull market is running out of steam and that momentum is building in the opposite direction.
Normally, confirmation comes from a break below the final candlestick. And, if you were trading off this, you might place your stop loss at the beginning of the first candle in the pattern.
A continuation signal
Three black crows and three white soldiers can also form part of a continuation pattern, when the market, instead of reversing, carries on in the direction of the trend.
This is called a three line strike, and looks something like this …
The three black crows are followed by an up candle that engulfs the size of all three proceeding candles, showing that buyers have come back into the market strongly.
So, what of those three big down candles on the FTSE this morning …
It’s not a text-book pattern, as we can see buying pressure coming into the market at the end of the day yesterday, leaving that long lower wick on the candle.
However, there’s also a head and shoulders in the picture, which shows some severe negative pressure coming into the equities markets at the moment.
And there’s plenty of news coming up before Easter that could make things even worse …