One of the most popular trading strategies which retail look for is candlestick patterns. For any financial security like stocks or derivatives, candlesticks indicate the opening, high, low, and closing prices for the chosen timeframe and a pattern in this provides the best opportunities.
How are Bullish and Bearish Candlesticks Formed in Technical Analysis of Stock Markets?
For stocks or instruments whose prices are moving upwards, the candlestick is usually represented in white or green. Such a candlestick group is termed a Bullish Candlestick pattern. When the price falls and bears overtake the bulls, a red/black or a bearish candlestick pattern is formed.
What Is a Three-Black Crows Candlestick Pattern?
Three black crows are a Bearish Candlestick Pattern in the Stock Market with three consecutive long-bodied bearish candlesticks forming the pattern. It describes the end of an uptrend. Traders use this indicator in conjunction with other technical indicators like Price action or Support Resistance for confirmation. The following picture indicates the Three Black Crows Candlestick pattern:
How are Three Black Crows Pattern Formed in Technical Analysis of Stocks?
Buyers initiate trading with a gap-up opening, with sellers pushing the price lower than the previous candle close. If this cycle occurs consecutively in three candle sessions, then the Three Black Crows Pattern is formed.
- The three bearish long-bodied candlesticks should have little to no wicks on the upside.
- Volume trend along with this three-black crow pattern makes it more accurate. If the volume during the uptrend is relatively decreasing and if this three-day black crow pattern is supported with high volumes, then there is a high probability of reversal.
Example of Three Black Crows in Technical Analysis of Stock Market:
From the above example, we can see that after an uptrend, a Three-Black Crows Candlestick Patter has emerged. After the pattern has emerged one can see how the price of the instrument has fallen.
Ideal Trade Set Up for Trading Three Black Crows Candlestick Pattern:
- Spot an uptrend movement in security.
- Locate three consecutive red (bearish) candles.
- Each candle should have a close lower than the previous candle.
- Take confirmation with other strategies- Price action, Support Resistance zones, etc.
- After confirmation, try to sell at the closing price of the last candle of the pattern.
Three Black Crows + RSI:
If this candlestick is spotted along with RSI greater than 70, it suggests that the stock has entered the overbought territory. In such a situation there is a high probability of buyers showing the least interest in the instrument as it is already being traded in the overpriced zones. Similarly, if this candlestick trio appears at a major resistance zone, buyers should get alerted and book profits as a pattern here could lead to a good correction.
It is important to note that, by the time this Three Black Crows Candlestick is formed, the security might reach its support zone.
Stop-Loss:
Stop losses for the Three Black Crows pattern in Technical Analysis of Stock Markets can be set via several methods and at several locations.
One way is to place an immediate stop loss above the high of the third candle.
Another way is to place a stop-loss above the top of the second candle.
The third way to put stop-loss in this pattern is to place it above the highest of this trio pattern.
Target:
Like stop-loss, targets can be set in multiple locations. Based on the stop-loss fixed, a target must be set based on the risk-reward ratio of 1:2, 1:3 or higher. One must remember that:
- Profiting with shorting is more reliable than buying as traders fear it.
- Highly feasible, favorable risk/reward ratios.
Psychology behind Three Black Crows Candlestick Pattern:
After an uptrend, the formation of the first long-bodied bearish candle indicates the entry and domination of sellers. The other two candles formed on the next days, (Day 2 and Day 3) confirm the strong dominance of sellers. A few advantages of using this pattern are:
- This pattern occurs frequently.
- Easy to trade and identify.
- Great pattern to identify reversal trades and book profits.
Limitations:
- This pattern can produce false signals if the markets are in consolidation.
- Trading this pattern on higher time frames might result in heavy losses.
- Since this pattern requires the formation of three candles, it leads to a late market entry.
Unfortunately, this Three Black Crows Candlestick Pattern in the Stock Market has been fooling traders for a long time. It is because, when an instrument is in an uptrend or in range, by the time this candlestick forms, the asset would have reached its support and entered the oversold zone. From here the price should begin to rise from this level of support, but instead, it falls. Ultimately it becomes a loss, where the person sells the asset when it is in its oversold zone and the stock has a high probability of reversal. Hence, for a stock that is on a strong uptrend, the most Practical Trade Set Up of This Black Crows Candlestick Pattern will be:
- Selecting stocks with a strong uptrend.
- Check if that pullback that has this Three Black Crows Candlestick Pattern takes its support either on a trendline, or on a support zone, or any Bullish Technical Indicators in the Stock Market, etc.
From the below Technical Analysis Chart, one can see that, after a down move, there is a Three Black Crows Candlestick pattern, which has led to the downfall of the asset. Sometimes this correction comes after the consolidation which might trigger the SL.
Chart
One might also observe that the Three Black Crows Candlestick pattern will be spotted in multiple areas, including the correction too. Hence, the area, the trend, technical strategies, etc. must be considered before initiating a trade based on this candlestick pattern.
Stop Loss and Target:
The low of the three candles should be taken as the stop loss and target can be fixed based on the previous trendlines, resistance lines, etc.
Bottom Line: To know more about Technical Analysis of Stock Markets, check out the free webinar from Top-Rated Stock Market Institute in India:
