Understanding the Three Black Crows candlestick pattern

What is the Three Black Crows candlestick pattern?

The Three Black Crows pattern is a bearish reversal signal. It forms at the top of a strong uptrend, and tells you that buyers are losing control and sellers are now taking over. The pattern consists of three consecutive bearish candlesticks that appear after a period of rising prices. The name comes from Japanese rice traders, who saw these candles as a bad omen, like three crows gathering.

This candlestick charting dates back to 18th-century Japan. Munehisa Homma developed the technique to trade rice. The pattern is based on supply and demand, and shows a clear shift in the market. The demand from buyers is dropping, and the supply from sellers is increasing. This pushes the price down.

The Three Black Crows pattern can be seen in many markets. It is common in shares and forex markets and is often seen in liquid markets. High trading volume can make the pattern more reliable.

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How to recognise the Three Black Crows pattern

The structure of the Three Black Crows pattern is very specific. It is made of three consecutive bearish candles. They are coloured black or red, depending on your chart. Each candle must close lower than the one before it.

Each candle opens within the previous candle’s body and closes lower. This is a key rule. The second candle must open inside the body of the first candle. The third candle must open inside the body of the second candle. Each candle must also close near its low. This shows strong selling pressure. The low of each candle should also be lower than the low of the previous candle.

Remember that the pattern is only valid if it appears after a clear uptrend. It is a reversal signal. It cannot be a reversal if there is no trend to reverse. A long uptrend before the pattern makes the signal stronger.

Ideally, you should also see increasing volume with each candle. Rising volume confirms the selling pressure. Plus, the body of each candle should be relatively large. Small candles show indecision while large ones show strong bearish momentum.

The pattern tells a story. On the first day, the sellers push the price lower. On the second day, they do it again. The third day is the final blow. Buyers who held on are now selling in a panic. The market mood has shifted from bullish to bearish. This is the market psychology behind the pattern.

How to identify the Three Black Crows pattern

You can identify the pattern on charts of different timeframes. However, some consider the Three Black Crows pattern more reliable on higher timeframes. For this, daily and weekly charts are the best. They filter out market noise. The four-hour chart can also be useful. Lower timeframes can produce false signals. On intraday charts, the pattern often appears due to noise and can be less reliable unless confirmed by volume and context.

You can use a checklist to validate the signal:

• Is there a clear uptrend before the pattern?
• Are there exactly three consecutive bearish candles?
• Does each candle open within the body of the previous one?
• Does each candle close lower than the one before it?
• Is there an increase in volume with the pattern?

If all these conditions are met, it’s likely to indicate a valid Three Black Crows pattern, though this doesn’t guarantee future performance or success.

You can also use tools to identify the pattern. Many trading platforms have pattern scanners. These tools can automatically find the pattern for you. However, you should always double-check with your own eyes. Look for the visual cues on your chart.

Learn more about identifying different candlestick patterns.

How to trade the Three Black Crows pattern

This pattern can help you with a clear swing trading strategy. To use it, the first step is to determine the entry point. The safest entry point is after the third candle closes. You can place a sell order (short position) just below the low of the third candle. You can also wait for a confirmation candle. This is a bearish candle that forms right after the pattern. A close below the low of the third crow is considered a strong confirmation.

A proper stop-loss* can be useful to limit losses. You can place your stop-loss just above the high of the first crow. This is the highest point of the pattern. If the price moves above this high, the pattern is invalid. This protects you from big losses.

Some traders set take-profit targets, you can use a few methods to do so. You can use a risk-to-reward ratio of 1:2 or 1:3. This means you aim to make twice or three times your potential loss. You can also use a previous support level as your target. Another method is to measure the height of the previous uptrend. You can project that distance downward from the high of the first candlestick of the Three Black Crows pattern.

**Standard stop-loss orders are not guaranteed. Guaranteed stop-loss orders incur a fee when activated.

Note: like all candlestick patterns, the Three Black Crows doesn’t guarantee a reversal. It should always be combined with confirmation tools and proper risk management. Past performance is not a reliable indicator of future results.

Breakout vs retracement approaches

Some traders enter immediately after the pattern closes. This is the breakout approach. It is an aggressive strategy. A safer approach is the retracement approach. You wait for the price to retrace. This means it moves back up slightly. You enter a short position at a better price with this method. This can also give you a better risk-to-reward ratio.

Confirming the pattern with other indicators

You should never trade based on one pattern alone. Always use other tools to confirm the signal before entering a trade. Here are some of the popular technical indicators used to confirm the Three Black Crows trading strategy.

Three Black Crows + Relative Strength Index (RSI)

The RSI is a momentum indicator. Look for the Three Black Crows pattern when the RSI is in the overbought zone (above 70). This confirms that the market is overextended. It gives a stronger signal. A bearish divergence on the RSI also strengthens the signal.

Three Black Crows + Moving Average Convergence Divergence (MACD)

The MACD also shows momentum. Look for the pattern when the MACD line crosses below the signal line. This is a bearish crossover. It confirms the selling pressure. A drop in the MACD histogram also confirms the bearish momentum.

Hull moving average (HMA) and moving average crossover confirmation

Use a moving average to confirm the trend. The HMA can be a good choice for this. If the price moves below the moving average, it is a bearish sign. A moving average crossover, where a short-term moving average crosses below a long-term one, confirms a new downtrend. This makes the Three Black Crows pattern a very strong signal.

Volume-based confirmation

As mentioned earlier, volume is key. A surge in volume on the three bearish candles confirms that the sellers are serious. A breakdown on low volume could be a false signal.

Live market setup

Imagine you are looking at a chart and see a clear uptrend. The price has been rising for weeks. Then, you see three large red candles. Each one opens within the body of the previous one. Each one closes lower than the previous candle. You check the RSI. It was just above 70 and is now turning downwards. The MACD has just had a bearish crossover. You see a big increase in volume. This is a perfect Three Black Crows pattern setup. You can enter a short position.

Learn more about technical analysis and other indicators.

Three Black Crows vs. other candlestick patterns

It is easy to confuse this pattern with other candlestick patterns. That is why it is important to know the differences.

Three White Soldiers

The Three White Soldiers pattern is the opposite of the Three Black Crows pattern. It is a bullish reversal pattern. It consists of three consecutive bullish candles. Each opens inside the previous one and closes higher. It signals the start of a new uptrend.

Evening star

The evening star is also a bearish reversal pattern. It is made of three candles. The first is a large bullish candle. The second is a small candle (star). The third is a large bearish candle. The star can be bullish or bearish. The Three Black Crows are all bearish.

Identical Three Crows

The Identical Three Crows pattern is similar to the Three Black Crows. It is also a reversal pattern. However, the open of the second and third candles are the same as the previous candle’s close. This is a less common variation.

Advantages and limitations of the Three Black Crows trading strategy

One of the primary advantages of the Three Black Crows pattern is that it gives clear bearish signals. Plus, it is easy to recognise visually with the three distinct candles. The pattern has historically been a reliable warning sign of a trend change, often preceding trend reversals. Past performance is not a reliable indicator of future results.

However, one of the limitations of the pattern is that it can give false signals in ranging markets. This makes it unreliable in sideways markets. Moreover, it needs confirmation with other indicators. The Three Black Crows pattern is also less reliable in low-volume assets. Low volume can lead to erratic price action.

When the pattern fails

The pattern does not work every time. This is especially true when it gives a false signal. A false signal is a pattern that doesn’t lead to a reversal. A fake breakout can also occur. This is when the price breaks a level but quickly moves back. With the Three Black Crows pattern, the price can move down but then quickly move back up.

The common reasons for pattern failure include a lack of volume. A pattern without volume is weak. Another reason is that a very strong support level below the pattern can prevent a breakdown. In addition, unexpected positive news can reverse the pattern.

You can reduce the failure rate by using a trend filter, so that you only trade if there is a strong uptrend. Always confirm with the pattern by looking for high volume. Check the signal on a higher timeframe for added confirmation.

Let’s understand pattern failure with an example. Imagine a stock has been rising. You see the pattern form. The price closes lower for three days. So, you enter a short position. Then, the company announces great earnings. The stock gaps up the next day, and the pattern fails. This is where a stop-loss could help by closing your position before losses mount.

Real-world examples

In the forex market, currency pairs like EUR/USD or USD/JPY can also show the pattern. For instance, if the EUR/USD has been in a clear uptrend and is approaching a major resistance level. A Three Black Crows pattern could form. This is a strong signal that the uptrend is losing steam. It can lead to a reversal in the pair’s direction. Many traders use this signal to enter a short position.

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