Part 6/11 - How to use [Three white soldiers candlestick Chart] to identify Bull market

This is the sixth part of a series which will show how we can use candlestick to identify bullish signal.

You can refer to the previous parts here:

Part 1/11 - How to use [Hammer Candlestick Chart] to identify Bull market

Part 2/11 - How to use [Inverse Hammer Candlestick Chart] to identify Bull market

Part 3/11 - How to use [Bullish Engulfing Candlestick Chart] to identify Bull market

Part 4/11 - How to use [Piercing line Pattern Chart] to identify Bull market

Part 5/11 - How to use [Morning star candlestick Chart] to identify Bull market

Do remember that we should never use candlestick chart alone when we trade, we also need to look out for other indicators which we are comfortable with.

In this part, I will be sharing Three white soldiers Bullish Signal.

Here is a recap on how to read a single candlestick

How to Read a Single Candlestick

• Each candlestick represents one day’s worth of price data about a stock through four pieces of information: the opening price, the closing price, the high price, and the low price.

• The color of the central rectangle (called the real body) tells investors whether the opening price or the closing price was higher.

• A black or filled candlestick means the closing price for the period was less than the opening price; hence, it is bearish and indicates selling pressure.

• Meanwhile, a white or hollow candlestick means that the closing price was greater than the opening price. This is bullish and shows buying pressure.

• The lines at both ends of a candlestick are called shadows, and they show the entire range of price action for the day, from low to high. The upper shadow shows the stock’s highest price for the day, and the lower shadow shows the lowest price for the day.

Thing to note about Candlestick Charts

• Candlestick Charts can help us as it reveal the market psychology (the fear and greed experienced by sellers and buyers) through the various indicators, such as shape and color, but also by the many identifiable patterns that can be found in Candlestick Charts.

• But do remember that Candlestick Charts do not express the events taking place between the open and close price - only the relationship between the two prices.

• So Candlestick Charts could not tell us how volatile trading was within that single time period.

What is a Bull Market and Bear Market

When we say market is Bullish, it means that an investor believes that a stock or the overall market will go higher. (They call it bullish because, when a bull attacks it moves it horns upward)

Bearish usually means that an investor believes a stock will go down or underperform. ( When a bear attacks it waves it claws downward, which can be related to the decrease in stock price).

But first, let us understand what is a Bullish Candlestick Patterns?

Bullish Candlestick Patterns

Over a period of time, there will be groups of daily candlesticks fall into recognizable patterns with descriptive names like three white soldiers, dark cloud cover, hammer, morning star, and abandoned baby, these are just a few of the many examples.

Patterns form over a period of one to four weeks and are a source of valuable insight into a stock’s future price action.

But it is important to understand the 2 principles before we go into details of each individual bullish candlestick patterns.

Here are the 2 principles you may wish to understand.

1. Bullish reversal patterns should form within a downtrend. Otherwise, it’s not a bullish pattern, but a continuation pattern.

2. Most bullish reversal patterns require bullish confirmation. In other words, they must be followed by an upside price move which can come as a long hollow candlestick or a gap up and be accompanied by high trading volume. This confirmation should be observed within three days of the pattern.

Bullish Reversal Patterns

As mentioned in the 2 principles, the bullish reversal patterns can be further confirmed through use of other traditional technical analysis, like trend lines, momentum, oscillators, or volume indicators. This can be done to reaffirm buying pressure.

There are a great many candlestick patterns that indicate an opportunity to buy.

But I would like to focus more on the Three white soldiers candlestick patterns that give the strongest reversal signal.

What is a Three white soldiers Pattern

The three white soldiers pattern occurs over three days. It consists of consecutive long green (or white) candles with small wicks, which open and close progressively higher than the previous day.

It is a very strong bullish signal that occurs after a downtrend, and shows a steady advance of buying pressure.

Understanding the Three White Soldiers Candlestick Pattern

The Three White Soldiers pattern is a bullish reversal pattern that typically forms at the end of a downtrend. It consists of three consecutive long-bodied bullish candles with small or non-existent shadows. Each candle opens within the range of the previous candle and closes higher than the previous candle's close, indicating a sustained buying pressure and potential shift in market sentiment.

Characteristics of the Three White Soldiers Pattern

1.     Appearance: The pattern is formed by three consecutive bullish candles, each opening within the range of the previous candle and closing higher than the previous close. The bodies of these candles are usually long and devoid of significant shadows or wicks. These candlesticks should not have very long shadows and ideally open within the real body of the preceding candle in the pattern.

2.     Volume: Ideally, each advancing candle should exhibit a higher trading volume, reflecting increasing market participation and confirming the strength of the bullish move.

3.     Trend Reversal: The Three White Soldiers pattern is considered a reliable signal of a potential trend reversal from bearish to bullish. It suggests that the selling pressure has waned, and buyers have gained control of the market.

Implications for Traders

1.     Reversal Signal: The Three White Soldiers pattern acts as a powerful bullish reversal signal, indicating a shift in market sentiment and a potential end to the downtrend. Traders often use this pattern to enter long positions, expecting further upward momentum.

2.     Confirmation: To enhance the reliability of the pattern, traders commonly seek confirmation from other technical indicators, such as moving averages, oscillators, or trendlines. The convergence of multiple signals can provide stronger support for entering a trade.

3.     Price Targets: After identifying the Three White Soldiers pattern, traders can set price targets by measuring the height of the pattern and projecting it upwards from the breakout point. These targets can help traders establish potential profit levels and manage risk accordingly.

4.     Stop Loss: Risk management is vital in trading, and implementing a stop loss order below the pattern's low is a common practice. This approach helps traders limit potential losses in case the bullish reversal does not materialize as expected.

I would use $Microsoft(MSFT)$ as an example to look at the Three White Soldiers candlestick pattern and see if it is true.

As seen in the chart below, we can see that the 1st candle of the Three White Soldiers appear on 14 Mar 23, the second candle on 15 Mar 23 close above the 1st candle, and the BUY volume is significantly higher each day.

And the 3rd candle close way higher than 15 Mar, and with a very large BUY volume.

This indicate that the bearish trend of MSFT has ended with a high BUY volume, as we can MSFT has been experiencing a Bullish trend since 16 Mar 2023.

Summary

Even though we can use the Three white soldiers to confirm whether there is a reversal of trend happening, but it would always be good to use it with combinations of other indicators like Moving Averages(MA), Relative Strength Index (RSI) and Parabolic SAR.

These are the indicators which I find useful to find out the trend of a stock, this could help us to also determine when we can go Long or Buy the stock.

At the end of the day, do remember to learn and be comfortable with the indicators you are familiar with.

Appreciate if you could share your thoughts in the comment section whether you also use candlestick chart to identify bullish signal. Do you find “Three White Soldiers” pattern useful?

@TigerStars @Daily_Discussion @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.