Topics Candlestick
Bybit Learn
Bybit Learn
Jul 29, 2021

How to Use Three White Soldiers Pattern to Spot Bullish Reversal?

In this article, we’re going to explore the three white soldiers candlestick pattern and see how it can help traders spot bullish reversal patterns in the cryptocurrency market. In technical analysis, some of the most popular price action patterns have funny names like “head and shoulders” or “cup and handle.” The names of these trading patterns are not random. Rather, they illustrate the overall shapes of the price actions.

In this regard, the “three white soldiers” pattern carries this name because its shape resembles three soldiers in a regular army formation, ascending.

Once you’ve seen the three white soldiers candlestick pattern, you can’t unsee it.

By the end of this introductory trading guide, you’ll know what defines the three white soldiers candlestick, why it’s useful in trading bullish reversals, and which trading strategy is the best to use when you’ve identified it.

What Are the Three White Soldiers?

The three white soldiers is a bullish candlestick pattern that occurs near the end of a bear market. It signals the end of the prevailing downtrend. This candlestick formation consists of three green candles that signal strong buying pressure which leads to a trend reversal.

This is what the three white soldiers candlestick pattern looks like:

Most traders who use Japanese candlestick charting techniques know that price action works better within the right context. Depending on where it develops within the trend, the three white soldiers can also be viewed as a continuation pattern. If this pattern forms in the middle of a bull market, it can act as a continuation pattern. When the pattern forms at the end of a downtrend, it acts as a price reversal signal.

From a supply and demand perspective, the three white soldiers can help traders identify a shift in market sentiment where buying pressure suppresses selling pressure.

Interpreting the Three White Soldiers Candlestick Pattern

As previously mentioned, the three white soldiers is a bullish pattern. Its characteristics include the following:

  1. Three consecutive green candles with a large trading range
  2. The candles are relatively the same size
  3. The candlesticks have small upper and lower wicks
  4. The second and last candle lows can’t go beyond the middle price range of the previous day
  5. The opening price of each candle is within the height of the body of previous candle
  6. The closing price of the second candle surpasses the first candle’s high
  7. The closing price of the third candle exceeds the second candle’s high

Visually, the three soldiers appear to be moving forward with no obstruction. This helps many traders determine which side of the market is prevailing. In this case, the bulls are beating the bears.

When there are multiple bullish candles with the closing price near the top of the trading range, it indicates that the bulls are in control of the market. Basically, for three consecutive days, the bulls have dominated the market, signaled by the closing price near the day’s high.

At the end of the day, these candlestick patterns imply that the rally might continue. Still, it’s wise to look as well at other technical indicators, such as moving averages or the stochastic oscillator, to confirm the shift in the market sentiment.

How to Identify the Three White Soldiers

Before you can correctly identify the three white soldiers, you need to know that not every instance of this pattern is tradable. There are several requirements that the three white soldiers pattern needs to satisfy.

To qualify each instance of the three white soldiers candlestick, traders should be looking to incorporate into their trading a three-step process:

  1. Market context — the pattern needs to develop at the end of a bear market
  2. Size of the candles — the three green candles need to be of substantial size
  3. Volume confirmation — an uptick in trading volume needs to be present to confirm the existence of a trend reversal

Market Context

As previously mentioned, the right context is a dealbreaker for most candlestick patterns. In other words, the three white soldiers need to form at the end of a downtrend or near a key support level.

For example, if the pattern forms inside a consolidation, it’s less reliable as a trend reversal signal. Secondly, the profit margins are thin when you trade a ranging market because the pattern will soon run into a resistance level. 

Basically, traders first need to identify a downtrend before the three white soldiers can “come to the rescue” as buyers defeat sellers. 

Candle Size

The second requirement for the three white soldiers is that you need all three candlesticks to be bold. Ideally, we want the candlesticks’ sizes to be larger than those of other candles in the immediate vicinity.

Additionally, the second candle can’t go beyond the middle price range of the previous day. The same is true for the last candlestick. This basically shows that there is little to no selling pressure.

When the three green candles are closing near the top of the candle, it signals that the bulls have been in control of the market through the entire day’s session.

Volume Confirmation

Last but not least, the three white soldiers should also be supported by rising volume. Volume is a key indicator that can be used to confirm price reversals. Without an increase in volume, this might simply be a bull trap that you want to avoid. If the three white soldiers are accompanied by light volume, it means that there’s no institutional buying.

To sum up, traders need to make sure there is an increase in volume to validate the strength of the bulls.

How to Use the Three White Soldiers to Identify Entry and Exit Points

There are different ways to trade the three white soldiers pattern. Usually, there are two approaches that anyone can use:

  1. A buy position is open when the highest price of the three green candles is broken, or
  2. Buying the pullback

In other words, the three white soldiers pattern is used as an entry to establish a long position. However, at the same time, traders who have been riding the prevailing downtrend can use this price reversal signal as an exit point. Bears will often liquidate their short positions when the three white soldiers pattern prints on the price chart.

The significant move higher that follows the three white soldiers pattern will often lead to the overbought market. In this case, technical indicators can provide more insight into what happens behind the curtain.

For example, the stochastic oscillator may have moved above 80, signaling overbought readings. In this situation, the price trends inside a consolidation, giving time to the stochastic oscillator to reset. These opportunities are great examples of buying on a pullback.

Real Case Example 

The daily chart for Bitcoin (BTC/USD) printed the following three white soldiers candlestick pattern in February 2021 after a multi-day sell-off. In this example, the prevailing trend is downward before the three white soldiers candlestick pattern leads the price to a sharp bullish reversal.

The bullish reversal pattern is confirmed once the highest price of the three candles has broken to the upside. Additionally, the stochastic oscillator reveals oversold conditions for Bitcoin, warning traders of an imminent price reversal. 

As you can tell, the price action itself — combined with the right context and other factors that can support the bullish case scenario — has led to the success of this long position.

Risk Management with Three White Soldiers

Managing risk, especially in the volatile cryptocurrency market, will help many traders keep their heads above the water where others have failed. As a rule of thumb, don’t risk more than 2% of your portfolio in any given setup. The stop losses tend to be wider with the three white soldiers pattern. If you risk more than you can afford to lose, you’ll get hit harder if the market goes against your position. 

Secondly, ensure that the candlestick pattern offers you at least a 1:2 risk-to-reward ratio. In other words, the reward is likely to be larger than the risk.

Three White Soldiers vs. Three Black Crows: Differences

The opposite pattern of the three white soldiers is the three black crows. The only major difference between these two patterns is that the three black crows form at the end of an uptrend. Unlike the three white soldiers pattern, which signals a trend reversal from bearish to bullish, the three black crows candlestick pattern signals a trend reversal from bullish to bearish. 

Secondly, whereas three green candles represent the three white soldiers, the three black crows pattern is represented by three consecutive red candles. They are also relatively large in size, have small or no wicks, and the second and last candle highs don’t go beyond the middle price range of the preceding candles. 

The same caveats regarding candle size, location within the trend, and volume apply equally to the three black crows and the three white soldiers.

The Limitations 

In the world of technical analysis, there is no perfect candlestick pattern. As such, the three white soldiers pattern comes with its own limitations. There’s always a risk that the trade won’t go in your favor, because past performance is not indicative of future results. 

There are some valid reasons why trading with the three white soldiers pattern is difficult. 

First, the pattern requires a lot of mental strength because it’s challenging to buy after a strong rally, as represented by the three green candles. Basically, your buy position gets triggered when the highest price of this formation is broken. So you’re buying higher, and you need to sell at even higher prices for you to make a profit. 

Secondly, since the protective stop loss is placed below the first candle’s low, you need to use a wider stop loss. If the profit potential is too small (relative to the size of your stop-loss), it’s not worth the risk to open a long position. To work around this issue, traders can wait for a pullback that may or may not happen — in which case there’s a high risk of missing the boat. 

Last but not least, trying to catch a falling knife is a risky business. Many traders avoid trading reversals altogether due to the high risk of losing money if the trade goes against their initial position. 

To hedge against the limitations of the three white soldiers pattern, traders need to look at other technical indicators for more clues. For example, many traders use the stochastic oscillator to confirm that the pattern forms at an oversold area before initiating a long position.

Closing Thoughts

The bottom line is that the three white soldiers candlestick pattern is a powerful tool you want to have in your trading arsenal. Visually speaking, the pattern is easy to identify, and it gives you critical information at first glance about the market sentiment. Therefore, it’s instrumental in pinpointing bullish trend reversals.

If you’re not familiar with the setup, you can hone your trading skill and learn how to better identify the three white soldiers pattern by using a practice account.

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