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Three White Soldiers – Definition – Example – How to Trade

What Do Three White Soldiers Mean?

Three White SoldiersThe Three White Soldiers is a bullish candlestick formation on a stock trading chart signaling a bullish reversal at the end of a downtrend.

The three white soldiers formation is used by analysts and traders to predict the reversal of the current downtrend in a stock pricing chart. The pattern consists of three consecutive long-bodied candlesticks that open within the previous candle’s body.  Each close exceeds the previous candle’s high. Ideally, these candlesticks should not have very long shadows or wicks.  Also, they should open within the real body of the preceding candle in the formation.

What Do Three White Soldiers Tell You?

The three white soldiers candlestick pattern suggests a strong change in market sentiment.  This can be for stocks, commodities, or pairs making up the price action on the chart.  In other words, there is a steady advance of buying pressure following a downtrend. When a candle closes with a small wick or no shadows, it suggests that upward momentum is keeping the price at the top of the range for the session. Upward pressure takes over the rally all session and closes near the high of the day for three consecutive sessions.

The three white soldiers often mean that the bullish pattern signals a reversal of price movement. As a result, some traders consider opening a long position to profit from any upward trajectory.  They see the three advancing soldiers as a buy signal for a continuing upward trend.  The pattern may suggest that the rally will continue, but traders should also look at other relevant factors before making a decision.

Why the Three White Soldiers Pattern Is a Bullish Indicator

No trend lasts forever. At the bottom of a downtrend, more and more traders anticipate a change whether for fundamental or psychological reasons. As a result, buying pressure mounts.  This buying activity forms the three white soldiers pattern. When this pattern forms in an uptrend, it can indicate the stock trend will hit higher highs. When trading for profit, analysts examine the pattern for evidence of buying and selling pressure.  Also, what the potential is for a reversal on the immediate horizon. This pattern is most likely to form where the market is reversing after a brief downswing. It may also form after a period of consolidation, which is still a valid sign of a move higher.  The most potential is when the advancing soldiers form at the end of a prolonged downtrend with pent-up buying demand.

Typically occurring at the end of a downtrend, the three white soldiers consists of three large bullish candles, each closing higher than the last.

  • No gaps – there should be no gaps between candles—each candle opens within the body of the one preceding it.
  • Short upper wicks – the upper wicks are short or non-existent, indicating that bulls managed to keep the price of the security near the height of its range for the period.
  • Large candle bodies – The wide trading range reflected in the large bodies of all three candles and the lack of any substantial upper shadow indicates the strength of bullish momentum.

As with any reversal pattern, an expansion on volume accompanying the three white soldiers lends additional strength to the signal. The three white soldiers candlestick pattern is a reversal pattern that forms at the bottom of a downtrend.

Tips for Trading the Three White Soldiers Pattern

The three white soldiers pattern requires three consecutive data points to signal a momentum shift.  The stronger the signal, the higher the chance that the market will continue to shift in an uptrend from a downtrend. There are several ways you can trade the pattern when you come across it.

  • Validate with other technical indicators – The first step you should do is confirm the signal using technical indicators such as the stochastic oscillator. This can help to validate what the candles are signaling since additional indicators can provide more insight into price action.
  • Confirm the momentum and direction – For instance, if the three white soldiers patterns appear at the bottom of a downtrend and you think a reversal is coming, you can use the relative strength index (RSI) to test the signal. This indicator can help you to forecast price moves because it tracks the momentum and speed of the market.
  • Consider opening a long buy position – The best place to enter your buy position is on any of the three soldiers. But it is best if you enter into a trading position on the first soldier. Three white soldiers pattern is a strong confirmation for any other bullish signals that the market has shifted to a bullish uptrend. The odds of this pattern working increases if the strong moves happen off oversold support. However, the danger of it not working increases if the moves take a chart into an overbought reading.
  • Protect a long position with a stop-loss – After initiating a long position, it is always prudent to define a stop-loss of the last low and take profit whenever there is any other sign of trend reversal.

Potential buying opportunity

Three white soldiers are a bullish visual pattern, it is used as an entry or exit point. Traders who are short on security look to exit and traders waiting to take up a bullish position see the three white soldiers as an opportunity. When trading the three white soldiers pattern, it’s important to note that the strong moves higher could create temporary overbought conditions. The relative strength index (RSI), for example, may have moved above 70.0 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. The significant move higher could also reach key resistance levels where the stock could experience consolidation before continuing to move higher. (Source: investopedia.com)

Three White Soldiers vs Three Black Crows

The opposite of the three white soldiers is the three black crows candlestick pattern. Three black crows consist of three consecutive long-bodied candlesticks that have opened within the real body of the previous candle and closed lower than the previous candle. Three white soldiers catch the momentum shift from the bears to the bulls.  Conversely, three black crows show the shift from bulls to bears.  The same caution applies about volume and additional confirmation before going long or short on either pattern.

Limitations of Using Three White Soldiers

Three white soldiers can appear during periods of consolidation.  In those instances, after a brief pause, the downward mega-trend can continue.  This is why caution and other fundamental analysis is a must.  No one wants to get trapped in a continuation of the existing downward trend rather than a reversal. One of the key things to watch is the volume supporting the formation of three white soldiers. Any pattern on low volume should be viewed with caution.  Low volume indicates the market action is driven by few rather than many investors.

To combat the limitation of visual patterns, traders use the three white soldiers and other such candlestick patterns in conjunction with other technical indicators like trendlines, moving averages, and bands. For example, traders may look for areas of upcoming resistance before initiating a long position or look at the level of volume on the breakout to confirm that there was a high amount of dollar volume transacting. If the pattern occurred on low volume with near-term resistance, traders may wait until there is further confirmation of a breakout to initiate a long position. (Source: ibid)

Three white soldiers summed up

  • Bullish formation – The three white soldiers pattern is a bullish candlestick formation that consists of three green or white candles that each close progressively higher than the first
  • Can signal a potential reversal – You are likely to see the pattern at the bottom of a downtrend
  • Driven by upward buying pressure – The three white soldiers mean that there is a steady advance of buying pressure, which could be translated as an upcoming price reversal.

Seek Additional Chart Confirmation

While the three white soldiers typically appear at the end of a bearish trend, it can also appear after a period of consolidation.  In that case, it is not considered a strong bullish signal. Also, the pattern can be almost become too robust. A series of three bullish candles that are extremely large can indicate an overextention pushing too hard too quickly. Because of this potential ambiguity, it is important to look for additional chart confirmation of the bullish reversal. Additional bullish price action is always the best confirmation.  Solid volume in subsequent sessions and proximity to a support level also strengthens the signal.

The three white soldiers is one of the many candlestick formations that are used by day traders to identify possible entries in the stock market.  This pattern forms at the end of a downtrend and it is a clear indication of a shift in the balance from the sellers to the buyers.  Therefore, it can be useful in determining a price reversal following a downtrend.  However, it can also be a signal for a brief consolidation period followed by continued downward pressure. Nevertheless, if you are scanning the market every day for signs of upward movement, this pattern should be your best friend. However, it is best utilized in combination with other momentum signals like volume, crossovers, breakouts, or moving averages.

Up Next: SBLC – What Is a Standby Letter of Credit?

SBLCSBLC (Standby Letter of Credit) is a bank guarantee to pay a specific amount of money to a seller if the buyer defaults on the agreement.

A standby letter of credit is a legal guarantee by a bank on behalf of its client.  It is an enforceable commitment of payment to a seller if the bank’s client defaults on the agreement.  An SBLC is used in international or domestic transactions where the seller and the buyer do not know each other or have different laws and regulations. The buyer is certain to receive the goods and the seller is certain to receive payment.  However, it doesn’t guarantee the buyer will be happy with the goods.  It is strictly an assurance that if goods are delivered, the receiving company can pay the bill or finish the project.

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