fbpx

Have you ever found yourself looking over charts and realize that you missed an amazing trade…

I am talking about one of those picture-perfect reversal patterns— that seemed to come out of nowhere.  

With thousands of stocks to scan and limited time on our hands, I wouldn’t be surprised if it happened to you too. 

And let me tell you—its frustrating. 

It’s nearly impossible to watch 10 stocks for that perfect move let alone 500 or more.  

Sometimes you catch the perfect reversal and sometimes you’re late to the party.  That’s just how trading goes.

So how do you get your cake and eat it too?

It’s called trading a Three Black Crows Japanese candlestick pattern.

With this pattern, you can still capture the reversal and get into the trade before the real momentum kicks in.  

Seriously, why step in front of a freight train trying to get a perfect entry price?  

Instead, let the trade come to you after the blood is shed during the reversal.  

And today I’m going to pull back the curtains and give out the secrets on the inner-workings of this strategy…

If you give me only 5 minutes you will learn the potential of this pattern along with how I use it to ride massive trends!

 

The Three Black Crows

 

Crows are the harbinger of bad news and sorrow and are commonly used in horror films for this reason.

They are dark, mysterious creatures that foreshadow trouble is near.  

Similarly in the world of trading, crows take the shape of consecutive red candles that form a path to lower prices.  

What is a Three Black Crows?  This is a candlestick pattern that requires a set of 3 red bars where each candle opening is lower than the previous bars open.

Let’s take a look at an example of a Three Black Crows Japanese candlestick pattern.

 

 

This powerful signal is one of the few patterns that signal the beginning of a new downtrend and the prelude to ferocious long-term momentum to come.  

Let’s take a look at this pattern in further detail and how it forms a strong trading signal.

 

The Pattern

 

As briefly described above, the Three Black Crows takes the shape of consecutive red candles.  

This indicates to a trader that a bearish trend is imminent and prices are expected lower in the upcoming weeks or months.

Since this is a trend formation and not a short-term breakout or momentum formation, it is typical to see trends that last longer than you may be used to seeing.

This is especially true as a breakout trader where you aim to capture short-term trends that only last days.   

Now it’s time to short every 3 red bars in a row?

No way!  

Let’s take a look at how to truly identify this pattern.

 

The Setup

 

Spotted what may be a Three Black Crows pattern?  

First, make sure you confirm this pattern with the 5 components of the Three Black Crows.  

5 components of the Three Black Crows :

  1. There must be 3 red candles in a row
  2. Each candles’ open must be lower than previous days open
  3. Each candles’ close must be lower than previous days close
  4. No significant lower wicks are seen on any of the candles
  5. The increasing size of candles is important to look for

 

Let’s dig a little deeper into the meaning behind this pattern and how each component above dictates what the markets will do next.

 

The Meaning Of The Three Black Crows

 

So what does this even mean?

After a period of strength in the markets, it’s natural for the bulls to weaken their grip and let the bears have some fun thus pushing prices lower.

For three successful days, the bears have driven price lower causing red bars to be formed.  This is the foundation of the Three Black Crows.

The Three Black Crows looks like a stair-step pattern with price heading lower.  This signals a firm reversal in the stock price with little holding it back.  

The continuous downward movement signifies the toughness of the bears and they are now in control of the stock.

It’s important to keep in mind that it is common to also have negative market sentiment coinciding with this price pattern which adds additional negative pressure on stocks.

Make sure to fully understand all news risks associated with the stock prior to trading this pattern as major external factors can make the stock chart act irrationally.

When there are multiple forces such as combining negative market sentiment with the Three Black Crows technical pattern it is highly likely that this will be a strong reversal pattern and a complete shift from a bull market to a bear market officially confirming the upward price movement has ended.  

Some traders will find similar patterns using intraday charts, but it is the most powerful for daily charts.  Since longer-term traders are trying to identify major trends that will define a lengthy market environment, this type of price action on a 5-minute chart will have little to no impact on the daily timeframes.  

There is one very common error traders make when identifying a Three Black Crows that can make or break this pattern.  

This overlooked factor is the increasing length of the bars during the 3-day formation period.  

It is imperative that traders keep an eye out for the length of the second and third candles as they must be approximately the same size (ideally larger) to show that the bears are in full control.  

If not, it is very likely that a hammer has formed and signaled to traders that bulls have taken control back and will drive price her in a trend-continuation pattern.

Do you know how to trade hammers the correct way?  Click Here To How To Trade Hammer Patterns The Right Way!

It’s great to read a description of a signal’s formation along with an explanation of its meaning…But that’s almost useless without real-life examples to go with it.

So let’s check out some of the most recent Three Black Crows and see if we can combine the theory above with market examples to fully grasp this concept.

 

The Reversal Pattern

 

When a Three Black Crows is seen at the top of an uptrend, it could be one of the most powerful reversal patterns and trend signals.  

In the example, you can see almost a perfect reversal setup.  

The stock is in an uptrend, with one of the best possible Three Black Crows you could find. 

This pattern is then followed by an immediate trend reversal and a new bear trend was formed.

 

 

This pattern is a perfect example of Three Black Crows and there are few times in trading where it can be this clean of a setup.

 

 

In this image above, we can identify a similar pattern to the illustration above.  The SPY’s are in a healthy long-term uptrend which seems to be “stalling out” at the top.

Usually, at the top of bull runs, there are “rounded” reversal patterns instead of “pointed” reversal price patterns.  

And this is no different…

A Three Black Crows pattern emerged right at the top of the run which caused a rounded reversal pattern to form.  

Shortly after this formation, the new trend was established with price continuing lower throughout the next two months!

Pro Tip: Look out for “the calm before the storm” candles that form right after the Three Black Crows.  Usually, 1-2 days of green bars will form as the bulls try one last time to push prices higher.  

Remember, for the best execution price it’s recommended to wait for “the calm before the storm” before placing a trade.  Sometimes it is not possible to wait for a “calm period” to enter a trade and may result in a missed trade.  

 

Failed Three Black Crows

 

The strength of the uptrend really does matter in reversal trading and with Three Black Crows, it is no different.

In this example, let’s take a look at how the Three Black Crows appeared after a brief uptrend.  This example gave us a weaker signal compared with the reversal above.

 

 

Why is this pattern weaker? What’s the giveaway?  A lack of confirmation and a weaker 3rd candle!

There are two problems: 

  1. the 3rd candle was “weak”
  2. There was a Bullish Reversal candle right after the Three Black Crows. 

 

Selling into this is what is called a “Bear Trap”.  (More on this at a later time!)

So what do you do? 

Enter a reversal only after a strong uptrend and wait for a confirmation of the reversal prior to entering the trade.

Did you happen to miss the reversal pattern at the top of the trend?  

Don’t worry!  

There is a way to still enter the trade as the new trend continues.

Let’s now take a look at a Three Black Crows as a continuation pattern instead of a reversal pattern.

 

The Continuation Pattern

 

I hope it’s clear how traders believe the Three Black Crows at the top of an uptrend is one of the most powerful reversal patterns in the markets.

After all, reversal trading can be one of the most exciting and also damaging to your account and it’s not meant for everyone.

So what happens if you miss the reversal pattern or if you are not a reversal trader?

Let’s take a look at an example of a continuation trade setup using the Three Black Crows.

 

 

In the SPY above, there was a strong uptrend and then the Three Black Crows took control and drove prices lower.  

That’s great if you are short and were able to capture the strong reversal but what if you missed the trade?

Well, that is where the continuation pattern of the Three Black Crows comes into action!

After the initial reversal pattern, many traders may write this off as a missed opportunity and move on with their scanning of the markets.

But that’s not always the best idea.  

Without the understanding a The Three Black Crows can be a reversal pattern AND a continuation pattern, many traders miss some of the best risk-to-reward trading possible.

Let’s put the pieces of the puzzle together and see what we get with a simple strategy to trade this pattern.

 

The Strategy

 

In this example let’s take a look at executing a short and using trailing stops to help with finding exit prices.

 

Trade Rules:

 

Enter Condition:

  • Go Short at the open the day following the Three Black Crows

 

Hardstop Condition:

  • Place hardstop above prior pivot level

 

Exit Condition:

  • Exit on break of 9 period EMA

 

 

 

Simple enough… right? 

That’s how it should be!  

Nothing voodoo magic or complex.  Just simple and straight forward trading logic to build a quick trading strategy using Three Black Crows.

Pro Tip:  Anything overly complicated usually leads to a poor performing trading strategy or system and should be ignored.  The KISS rule is important here.

Remember, this is for illustration purposes only.  Feel free to trade the strategy however you feel comfortable.  

 

Final Thoughts

 

So now when you spot a Three Black Crows, you better sit up, buckle in, and pay attention.  

This pattern is unique and powerful and if traded correctly can leave you with great profits.

What you learned:

  • Three Black Crows are both a trend reversal and trend continuation pattern
  • Strongest reversal patterns occur in strong uptrends
  • Try to avoid trading range-bound markets with this pattern
  • Sell-offs are usually quick, so trail stops with a fast ema
  • Risk management is key to protecting all trades

 

Now get out there and go crow hunting!

 

Author: Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com weekly podcast WealthWise where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share the wisdom needed to live a wealthy life.

Learn More

Leave your comment

Related Articles: