Definition
The Three White Soldiers pattern consists of three consecutive long bullish candles that close progressively higher, indicating a strong reversal from a bearish to a bullish trend.
The Three White Soldiers is a reliable bullish reversal pattern in technical analysis, often signaling the end of a downtrend and the start of a new uptrend.
How to Identify the Three White Soldiers Candlestick Pattern
- Prior Trend: Look for a preceding downtrend. The pattern is a reversal signal, so there should be a clear bearish trend before the pattern appears.
- Three Consecutive Bullish Candles: There should be three long bullish (white or green) candles that appear consecutively.
- Progressively Higher Closes: Each of the three bullish candles should close higher than the previous one. This indicates continued buying pressure.
- Opening Within Previous Candle’s Body: Each subsequent bullish candle should open within the body of the previous candle. This shows the continuation of the bullish sentiment.
- Long Real Bodies: All three candles should have a long real body, which indicates strong buying pressure. Wicks (shadows) can be present, but the main body of the candle should be notably long.
- Limited or No Lower Shadows: Ideally, these candles should have little to no lower shadows (wicks), suggesting that bulls are in control for most of the trading session.
- Volume Confirmation: For added confirmation, it’s beneficial if the pattern is accompanied by increasing volume on each successive candle, showing growing conviction among traders.
By ticking off these points while analyzing a chart, traders can confidently identify the Three White Soldiers pattern and consider potential bullish trading opportunities.
Significance of the Three White Soldiers Pattern
1. Strong Reversal Indication: The primary significance of the Three White Soldiers pattern lies in its ability to signal a powerful reversal. After a prevailing downtrend, the appearance of this pattern is a strong indicator that the bearish sentiment is exhausted, and bulls have taken control. Its presence can often be an early sign that the tide is turning, and a new bullish phase might be commencing.
2. Confidence in Continuation: Unlike some other patterns that may only suggest a brief respite in a prevailing trend, the Three White Soldiers is assertive in its indication of continued bullishness. This is primarily due to the progressively higher closes over three sessions, suggesting not just a momentary shift, but a sustained buying interest. For traders, this provides a robust cue to consider long positions or to refrain from short-selling.
3. Volume as a Confirming Factor: One of the defining features that can heighten the reliability of this pattern is the associated trading volume. When the three successive bullish candles are supported by increasing volume, it adds weight to the pattern’s predictive power. It indicates not just a passive change in sentiment, but an active and growing interest from buyers, making the reversal signal even more compelling.
4. Setting Risk Parameters: For new traders especially, having clear patterns like the Three White Soldiers can be instrumental in risk management. Once identified, traders can set stop-loss orders just below the first or second soldier, ensuring they have a defined exit point if the pattern doesn’t play out as anticipated. This clear structure gives traders a framework for potential entry and exit, simplifying decision-making in often volatile markets.
Activity of Big Traders during the Formation of Three White Soldiers
1. Accumulation Phase: The presence of the Three White Soldiers often hints at significant buying activity from institutional or “big” traders. Before the pattern’s formation, during the preceding downtrend, big traders might have been accumulating positions, quietly buying up assets at lower prices. The first bullish candle of the pattern might represent the point at which this accumulation becomes more aggressive, leading to a noticeable shift in price dynamics.
2. Momentum Shift and FOMO: The continued bullishness indicated by the second and third candles can suggest a couple of underlying dynamics. First, as big traders continue their buying spree, they start triggering stop-loss orders of bearish traders, causing a cascading effect of buying. Second, the visible change in sentiment can lead to a Fear Of Missing Out (FOMO) among other institutional and retail traders. They, too, jump into the market to capitalize on the emerging uptrend, further propelling prices upward.
3. Price Levels and Liquidity: Big traders, due to the sheer size of their orders, require substantial liquidity to enter or exit positions without causing extreme market disruptions. When they recognize a bullish reversal, as signified by the Three White Soldiers, they may see it as an opportunity to establish long positions at favorable prices, knowing that the increasing bullish sentiment will provide the necessary liquidity.
4. Signaling and Strategy: One nuanced point is that big traders are aware of the technical patterns retail traders watch for. Sometimes, the formation of such a distinct pattern like the Three White Soldiers can be used strategically, creating a self-fulfilling prophecy. By pushing the price in a manner that forms this pattern, big traders might be indirectly signaling their bullish stance to the market, knowing that it’ll encourage further buying from technically-inclined traders.
High Probability Confirmation Tools
| Tool | Confirmation Significance |
|---|---|
| Key Support/Resistance Level | If the pattern forms near a historically significant support or resistance level, it reinforces the reversal signal. A pattern formation near a key level indicates that the market respects these zones and a bullish turnaround is more likely to sustain. |
| Break of Low After Pattern | If, after the formation of the Three White Soldiers, the price doesn’t break the low of the pattern, it’s a strong sign that the bulls are maintaining control. Conversely, a break below might indicate a false signal or potential pattern failure. |
| Volume Surge | An increase in trading volume accompanying each successive candle strengthens the pattern’s validity. It shows that the bullish sentiment isn’t just superficial; there’s significant buying interest propelling the price upwards. |
| Momentum Indicators | Tools like the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) can offer further insight. If RSI is moving out of oversold territory or MACD is showing bullish crossover around the same time, it aligns well with the bullish reversal sentiment of the pattern. |
Traders should always look for these additional confirmation tools when identifying the Three White Soldiers pattern to ensure they’re acting on high probability setups.
Trading the Three White Soldiers: Key Considerations
Best Timeframe: While the Three White Soldiers can appear across various timeframes, it’s often most reliable on the daily chart. This timeframe captures more significant sentiment shifts, reducing the chances of false signals that can be common on shorter timeframes like the 1-hour or 15-minute charts.
Trading Session: The pattern’s reliability tends to increase when spotted during major trading sessions, such as the New York or London sessions, due to the higher volume and liquidity present. Trading during these sessions can reduce “noise” and offer clearer signals.
Winning Ratio: On its own, the Three White Soldiers can yield a winning ratio of around 60-65%. However, when combined with other confirmation tools and proper risk management, traders can potentially push this winning ratio higher.
Trading Strategy with Confluence
1. Confluence Factors: Before entering a trade, look for other confluence factors that align with the Three White Soldiers pattern. These could include:
- A significant support or resistance level.
- Bullish divergence on indicators like RSI or MACD.
- Key Fibonacci retracement levels aligning with the pattern.
2. Entry Point: Once the pattern is identified and other confluence factors align, consider entering a long trade after the close of the third bullish candle.
3. Stop Loss: Set a stop loss below the low of the first or second soldier. This provides a buffer if the market unexpectedly turns bearish after the formation of the pattern.
4. Take Profit Level: Target a risk-to-reward ratio of at least 1:2 or 1:3. For instance, if your stop loss is set 50 pips below your entry point, aim for a take profit level 100 to 150 pips above the entry. Alternatively, consider taking profit near a significant resistance level or when other technical indicators suggest weakening bullish momentum.
Conclusion
The Three White Soldiers pattern is a robust bullish reversal signal, particularly when validated by additional confluence factors. By integrating this pattern into a comprehensive trading strategy and practicing disciplined risk management, traders can capitalize on potential uptrends and maximize their chances of successful trades.
