The Three Black Crows pattern is a widely recognized candlestick pattern among traders. This article will provide valuable insights on how to incorporate this pattern into your trading strategy. Despite its subtle nature, we will offer a comprehensive guide on how to spot the Three Black Crows pattern and leverage it in your trading approach.
In addition to this, a well-rounded trader should have a diverse portfolio. Therefore, we will provide you with three alternative trading approaches ideal for trading in various markets, such as Stocks, Cryptocurrencies, Commodities, Forex, and even NFTs.
However, it is important to note that successful trading with candle charts goes beyond just recognizing patterns. Traders must also consider the context of risk and reward before making a trade based solely on a candle pattern. Understanding risk/reward analysis is crucial for making informed trading decisions.
While the color of candlesticks may not be inherently linked to the name of a particular pattern, traders can associate red candles with black candles of the past. The Three Black Crows pattern, a bearish reversal pattern, is identified by three consecutive red candles. This pattern indicates lower prices, especially when it appears at higher price levels or after a mature advance. In Japanese, it is referred to as the “three-winged-crows” pattern, as the expression goes, “Bad news has wings.” This image of a group of crows perched on a tall dead tree carries bearish implications.
To identify this pattern, the three candles should close at or near their lows. Ideally, each opening should be within the prior session’s real body.
However, you must be cautious when interpreting the pattern, as the three black crows pattern alone is often insufficient to short a market. For example, Steve Nison states that this pattern is more reliable for longer-term trades, as the pattern consists of three candles and takes a long time to confirm. Thus, as you wait for the third candle to confirm, the main “short-term” downward momentum might be finished. However, if other indicators also confirm the validity of the pattern, it might create a favorable risk/reward ratio in the longer term. Even though the market might retrace a bit after the Three Black Crows pattern is completed, the long-term momentum will decrease. This is also illustrated in the chart below, where you can see a slight pullback in the market after the pattern is confirmed. Thus, it is advisable to use a wider stop-loss when trading the Three Black Crows pattern.
The next three strategies are actually universal and could be applied to any asset class.
For this strategy, we look for the Three Black Crow pattern alongside two additional indicators to confirm the pattern, the MACD, and LRC. Those indicators work really well together as both can be used to identify momentum changes. This example offers a remarkable live scenario of a long-term trend reversal on the KeyCorp (KEY) chart, a retail bank. Following a significant hike in 2021, KeyCorp’s market experienced a downtrend reversal.
On January 18th, 2022, the pattern’s first candle formed, while the LRC Indicator and MACD also signaled a top had been reached, providing an opportunity to go short. You can see that the value on the MACD is almost at 1, and the LRC line just created a new high around the 27 mark. After the high, we see the three black crows’ pattern form.
The pattern was completed two days later, and the market lost some downward momentum, prompting a decision to either open a short-timed position with leverage or go for a longer timeframe trade.
In this instance, opting for the longer timeframe trade was preferable, given the market’s top was in place for a long time. An advisable approach was to set a stop loss at the level where the first candle of the candlestick pattern started, serving as a new top and resistance. Ultimately, the strategy yielded a return of nearly 30% and potentially more with leverage.
In this strategy, we employed the Pivot Points indicator, commonly utilized in technical analysis, to identify the market’s overall trend across various time frames. The Pivot Points indicator is a bit unusual as it skews the charts a bit with its lines, which are indicated with R1 and R2 levels. You can see the lines in the first chart below. The second chart shows the same, just in a normal view.
Our trading activity focused on the US Dollar/Japanese Yen pair within the forex market, with positions typically entered on a 1-hour timeframe.
Pivot Points are determined by taking the average of the intraday high, intraday low, and closing prices from the previous trading day. It is important to note that the Pivot Point indicator can alter the chart’s scaling and layout; therefore, one should not be alarmed if this occurs. For candlestick pattern identification purposes, switching to a view without Pivot Points is advisable, like in the second chart.
In this trading scenario, we observed that the price action had risen almost two resistance levels after breaking through R1 and coming to a halt on March 8th, just before the R2 level. The first red candle of the three black crows pattern was forming.
Once the confirmation of the third candle was obtained, we could enter into a short position with a stop loss just above the R2 resistance level. The trade would have played out positively, giving you a nice short opportunity with leverage, as the price did not touch the resistance in the following days.
Here we wanted to demonstrate the ZigZag indicator with Keltner Channels in a live scenario. We selected the Bitcoin Cash chart to identify potential trend reversals. However, this strategy would be possible with any other asset.
The ZigZag indicator is a widely used tool for identifying trend reversals by highlighting support and resistance areas and filtering out short-term fluctuations to eliminate market noise. You can spot the ZigZag indicator, which looks like a ZigZag, forming a line pattern as it goes from swing lows to highs across the chart.
On the other hand, Keltner Channels are volatility-based bands placed on either side of an asset’s price that can assist in identifying trend direction. So, they are a nice pair to use in combination for a wide analysis. The Keltner Channels are the three lines, with the light-blue area in between. Thus, together they form a channel, with the middle one being average and the other two forming the outer extremes of the channel.
Given the volatile nature of Bitcoin Cash, our objective is to locate a favorable reversal pattern to capitalize on. Our strategy comes together on February 22, where the pattern and the indicators converge to suggest a short-sell opportunity. The trend is beyond the bands, peaks with the ZigZag Indicator, and then swiftly reverses to the middle of the channel. Once the Three Black Crows appear, you can enter a short position from $130 to $110, yielding a potential profit of almost 15% or more, depending on the leverage used.
No technical analysis tool is 100% accurate, and this includes candlestick patterns. While they can provide you with an edge in the markets, their effectiveness depends on several factors, such as timeframe, asset, volatility, and the specific entry/exit trading rules the trader sets. Therefore, you should exercise caution when using candlestick patterns and not rely solely on them for trading decisions.
There are several examples of situations when candlestick patterns fail to predict price movements. For instance, a candlestick pattern may indicate a reversal of a trend, but unexpected news events or market conditions could result in a continuation of the trend. A candlestick pattern may appear to be forming, but the lack of trading volume could make it less reliable.
Before incorporating candlestick patterns into your trading methods, you should do extensive research and backtesting to enhance your performance. You should also consider other important market indicators, such as volume, order flow, and news events, and avoid relying too heavily on patterns. This can result in your trading strategy lacking diversity, raising your risk exposure.
In conclusion, you shouldn’t base all of your trading decisions simply on candlestick patterns, even though they can provide insightful analyses of market emotion. Before trading candlestick patterns, you should extensively study and backtest, and consider other important market indicators. You can boost your chances of market success by doing this and avoiding costly mistakes.
When trading candlestick patterns, having the right platform is crucial to success. Here are some key factors to consider when choosing the best platform:
If you’re looking for a platform that offers all of these features, Morpher is a great choice. It’s specifically designed to provide the best trading experience possible, with maximum flexibility, a wide range of assets to trade, great indicators and an advanced chart view, infinite liquidity, and zero fees.
In conclusion, these patterns have proven to be valuable tools for making profitable trades. By incorporating the Three Black Crows patterns into your trading strategy and using technical indicators to identify market trends, you can maximize your chances of making informed trading decisions.
Disclaimer: All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, or individual’s trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs. This post does not constitute investment advice.
Hundreds of markets all in one place - Apple, Bitcoin, Gold, Watches, NFTs, Sneakers and so much more.