Avdhut Bagkar | Business Standard
In stock market trading, "three white soldiers" is a candlestick pattern that indicates a reversal in the downtrend. It consists of three continuous green candles with a strong close. Every next candle closes above the previous green candle high, signifying a likely change in the sentiment. On the charts, such a scenario reveals bulls getting aggressive with every weakness being bought into. Though the trading volume plays a crucial role in building and defining a trend, the volume structure may be kept aside if the strength in price is visible.
This pattern is viewed as an extremely bullish as continuous three positive closes indicate the beginning of a strong buying, which began with the first day’s move and got carried forward to the next two sessions. If this buying continues or holds the upward bias, the volume and investor interest also start to pick up pace.
Traders who are short on the security look to exit and traders who are waiting to take up a bullish position see the three white soldiers as an entry opportunity.
The pattern indicates a reversal in trend with downside capped at the lowest low of the green candle
If this pattern succeeds in the short term, then the same support levels may act for the medium-term as well
Normally, such patterns witness simultaneous / continuous upside. If that does not happen, and stock enters a consolidation mode and then it may signal may suggest weakness. IN such a scenatio, investors can exit
When correlated with Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) indicators, the pattern can provide a more certain outlook for the stock
Can be used for long-term investment if it appears on the monthly and yearly charts of a stock
That said, not every rise in a stock can be attributed with this pattern. One needs to be careful and correlate this with the RSI or MACD. Besides, the closing of every green candle with minimum upper and lower shadow should be given prime importance. (Pidilite Ind chart)
When trading the three white soldiers pattern, it's important to note that the strong moves higher could also create temporary overbought conditions. The relative strength index (RSI), for example, may have moved above 70 levels. In some cases, there is a short period of consolidation following the three soldiers pattern, but the short- and intermediate-term bias remains bullish.
Which formations of “three white soldiers” need to be avoided?
When the 2nd or 3rd green candle opening is above its previous candle close;
In these three candles, if the scenario shows strong fluctuation on volumes on either side – a significant sharp rise or fall; and
The 1st candle low is broken by either two candles
Can you entirely rely on three white soldiers pattern?
The simple answer is no. One needs a trained eye and build a strategy around this pattern that can provide more trading opportunities and a better picture of how long to stay in the stock using this chart formation. There are different candlestick patterns that can also deliver good returns. Relying on a single candlestick would not provide trading comfort. Understanding and using the other candlestick patterns such as Morning Star, Evening star, Doji, Hammer, etc. will assist in identifying a larger trend. Once you can identify the three white soldiers, the trend from thereon will get easier to identify if other candlestick patterns are correlated with this.
The drawback of three white soldiers pattern is that there is no confirmed target for the stock though the trend continues to remain bullish and every upside is supportive of buying momentum. (Godrej Consumer chart). The opposite pattern of three white soldiers is three black crows, which indicates a reversal of an uptrend.
Disclaimer: This information is from a third party—Business Standard—offered through a tie-up to Kotak Securities customers. Click here for complete disclaimer.
The analysis has been done by a Business Standard reporter who is a certified technical analyst. The analysis does not represent the views of Kotak Securities.
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