The Three White Soldiers candlestick pattern is a reversal formation with three bullish candles. This pattern often occurs at the trough of a downtrend, signifying the start of a price rise.
Each of the three candles that form the pattern has the following characteristics:
- Opens above the open of the previous candle.
- Closes near its high with little or no upper wick.
- Displays consistent bullish momentum with each subsequent candle.
This is a pattern that is highly probable to occur in any type of market, even including stocks, where gap occurrence between trading sessions takes place. However, it could easily be found in Forex, commodities, and indices.
To consider it reliable, it works perfectly on longer time frames like daily or weekly charts.
How to Identify Three White Soldiers Candlestick Pattern
To identify the Three White Soldiers pattern on a chart, one should advance with the following:
Setup After a Strong Downtrend:
The pattern establishes its setup after a strong downtrend and shows that a reversal is likely.
Seek Three Bullish Candles:
Look for three bullish candles in consecutive order, where each candle opens higher than the open of its predecessor while closing higher than its preceding close, showing unwavering buying pressure.
Ensure the Structure Matches:
The candles should be small or without an upper wick, which would indicate that buyers were in control over the price during this session.
Confirmation with Technical Indicators:
Use tools like RSI, Fibonacci retracements, or moving averages to confirm the dependability of the pattern.
How to Trade the Three White Soldiers Pattern
The trade of the Three White Soldiers pattern requires precision in implementation and strategy. Here is a step-by-step method in which one can try to maximize the potential of such a pattern:
Entry Point:
- Take long positions on the close of the third candle.
- Alternatively, for a more conservative approach, wait for a pullback to a Fibonacci retracement level or a key support zone before entering.
Placing Stop Loss:
- Place your stop loss below the low of the first candle in the pattern. This protects you in case of sudden reversals.
Profit Target:
- Place your target profit at the nearest resistance level or a Fibonacci extension level.
- A popular technique is to measure the distance of the preceding downtrend and project that distance upward from the breakout point.
Example Trade Setup
Assume the market was in a downtrend, making lower highs and lower lows. You encounter the Three White Soldiers pattern at a key level of support:
- Verify the Pattern: The three bullish candles fulfill all structural requirements.
- Verify with Indicators: Use tools such as RSI (oversold conditions) or MACD (bullish crossover) to give added confidence.
How to Enter and Manage the Trade:
- Enter a long trade at the close of the third candle.
- Put your stop loss below the low of the first candle.
- Place a profit target at the nearest resistance.
That, combined with a Fibonacci retracement—if the price retests the breakout level—is a conservative way to enter the position because it reduces your risk and increases the odds for a profitable trade.
Advantages of the Three White Soldiers Pattern
The Three White Soldiers pattern has several advantages for a trader:
- Easy to Recognize: The pattern consists of three consecutive bullish candles, making it easy to identify.
- High Accuracy: When confirmed with other indicators, it gives a strong signal of market reversal.
- Versatility Across Timeframes: It works on daily, weekly, and even intraday charts, with higher reliability on longer timeframes.
- Complements Other Tools Nicely: It works effectively with tools like Fibonacci retracements or trend lines.
Limitations of the Three White Soldiers Pattern
While the Three White Soldiers pattern is powerful, there are a few drawbacks:
- Prone to False Signals: This pattern may not sustain a bullish move when markets are consolidating or volatility is low.
- Tight Stop Losses: Suggested stop-loss placement can be too tight, resulting in premature exits due to minor volatility.
- Market Context Matters: The pattern works well in trending markets and may fail if used in isolation.
Best Practices for Trading the Three White Soldiers Pattern
To maximize the efficiency of the Three White Soldiers pattern, follow these best practices:
- Combine with Indicators: Use confirming indicators like RSI, MACD, or moving averages to validate the pattern.
- Wait for Key Breakouts: Allow the pattern to break above a key resistance level before entering the trade.
- Fibonacci Levels: Use Fibonacci retracements to find the best entry during a pullback.
- Adopt Proper Risk Management: Always use stop losses and maintain a favorable risk-to-reward ratio to protect against unexpected market moves.
Key Takeaways
- The Three White Soldiers is a pattern of three consecutive bullish candles that work effectively as a bullish reversal when combined with complementary tools in trending markets.
- It helps traders identify and exploit buying opportunities, but only if verified with indicators such as RSI, MACD, or Fibonacci levels.
- While trading this pattern:
- Enter at the close of the third candle or on a pullback.
- Place a stop loss below the first candle.
- Target key resistance levels for taking profits.
