- July 2, 2021
- Posted by: CoachShane
- Category: Trading Article
The Three (3) Black Crows trading pattern is a bearish reversal candlestick pattern that appears in an uptrend.
Many traders use it as the name suggests which is a huge mistake.
If you simply sell when the pattern appears, you are looking at amassing a large amount of losing trades.
This pattern, by itself, is missing one important thing you need to know before taking a trade.
We will cover that later.
Let’s discuss what this pattern looks like
Three Black Crows Explained
We are looking for 3 bearish candlesticks with lower opens and lower closes that show up in a market that is in an uptrend.
While it is described as “black crows”, candles can be any color just as long as the close is lower than the open and the wicks are not too large.
These candles won’t look exactly like this especially in the stock market where you see gaps in price.
There are also rules that will state that the open of second and third candle has to take place inside the body of the previous candlestick.
Does it make a difference? What we are seeing is the opening price higher than the previous days closing price. Will that make a substantial difference in the success of the pattern?
We will get to that.
Bottom line, we need to see the current candle closing lower than the previous candle.
What Does The 3 Black Crows Mean?
This is a strong visual bearish candle pattern that stands out on a chart and they are easy to see.
What they are representing is a strong bearish side to the market. When traders see it in a sustained uptrend, emotions can come into play.
- Traders that are long may look to sell
- Traders may think we are seeing a reversal to a down trend.
Action will be taken.
If you consider the gap in the open price as the original rules suggest, traders will be seeing the bulls getting taken out when they try to go long.
Once price hits lower, the buyers exit their position fueling the move to the downside.
This chart is of ticker MFSL and is currently showing the pattern.
This chart is an an uptrend that is running into all time highs and psychological round numbers. It fulfills all requirements of a bearish candlestick pattern.
If you were long the momentum green candle, what would you be thinking as you see the stock shutting down like this?
Is that enough for you to sell?
That is the point of this article.
Just seeing the pattern should not be enough for any trader to decide to enter a short position. All we are seeing is sustained bearish action over 3 periods (3 hours, 3 days, weeks, months)
How To Trade The 3 Black Crows Pattern
The biggest takeaway will be to not treat it as a bearish reversal pattern without some type of confirmation.
Instead, we will treat it as sign to look for a continuation move back in the direction of the uptrend.
Let’s talk about the confirmation for a bearish move first.
In order to do that, understand what the price action movement of a trend is:
- Uptrend is a series of higher swing highs and lows
- Downtrend is a series of lower swing highs and lows
In an uptrend, price movement would look something like the following:
As long as that trend structure is in place, looking to short is not a wise move.
This stock is in an uptrend, the 3 Crows set up and if you short, you are in a losing trade quickly.
In order for this to be a legitimate contender for a short, you’d want to see, at a minimum, a lower swing high plotting on the chart. You could use a technical indicator for trend but price is my favorite.
The confirmation you’d be looking for is: a price pattern trend direction change where a swing low has been taken out and a lower high.
- Look for the trend structure to change to lower highs and lower lows
- You can use the pattern as a trade setup
If you are seeing a change in trend, then find your entry short using your techniques. Just know that when trends truly change, it doesn’t usually happen with a quick movement. Those holding long will be doing their best to hold the trend.
What is the better way?
Use the 3 Black Crows As A Long Trade Setup
We talked about what makes a true trend reversal.
It’s not just a candlestick pattern.
It’s a change in structure.
The value in the 3 Crows was mentioned in number two above: Use it as a trading setup.
Imagine this is an uptrend in price.
The pullbacks (corrections in price) are where we would look for the pattern as noted with the red arrows.
Once the pattern is found, we would look to find a reversal back in the direction of the trend.
Why does this have merit?
- Remember the emotional aspect of the pattern. Traders seeing the pattern don’t want to miss the short so they sell.
- Those holding long look to exit their position
- Price reverses taking out the shorts and having buyers that exited, buy back in.
- Those who held long add to their position as they see price heading back up
Take a look at this chart.
Price turns from a down trend to an uptrend.
A correction in price takes place putting in the 3 Crows.
A trade entry can be a break of the third crow, a trend line break, or some type of trading indicator entry.
See the black star?
Price was in a structure down trend and after the pattern shows up, you look for the pullback and trade the reversal.
3 White Soldiers
This is the exact opposite of what you just read.
In this case, you’d be looking for these as a pullback in a down trend. While the original and often taught method is a trend reversal, you now know to use price structure.
Using the 3 Black Crows as a trend reversal pattern discounts the importance of trend structure. Using the pattern as a shorting signal will fail more often than it will work out.
The better use is to look at them during the corrective move of an uptrend. We discussed the emotional aspects of the pattern and we look to take advantage of that.
Can you sell when they appear?
If I were stuck on the normal teaching, if I were to short I would be quick to cut any trade that goes against me.
The safer way is to consider using them in the manner discussed.