Reversal Patterns –

The Head and shoulders pattern is a reversal trading strategy, which can develop at the end of bullish or bearish trends. It is often referred to as an inverted head and shoulders pattern in downtrends, or simply the head and shoulders stock pattern in uptrends. In theory, they foretell the slowing momentum in either direction as the stock is unable to put in further highs or lows.

Traders like to trade head and shoulders patterns as the price targets are very predictable and the formation has an overall high success rate.

What do Head and Shoulders Chart Patterns Look Like?

The head and shoulders chart formation consists of three peaks, which develops after a strong bullish trend. The first and last peak are approximately the same height and are classified as the shoulders.

The second peak is the highest of the three and is classified as the head of the pattern.

Head and shoulders charts represent the transfer of power from the bulls to the bears in a topping pattern. In essence, it is a distribution pattern. Bulls who were buying the breakout (head), provided the liquidity for larger players to sell into, thus bringing the stock back down.

Please see the below illustration of a head and shoulders pattern top:

head and shoulders topping pattern — Head and Shoulders Top

What Do Inverse Head and Shoulders Chart Patterns Look Like?

Conversely, the inverted head and shoulders pattern is the head and shoulders bottom.

Instead of peaks, there are troughs. This reversal pattern develops after an extensive bearish trend and represents the transfer of control from bears to the bulls. Like the topping pattern, here bulls are using the breakdown as an opportunity to go long at lower prices. It could also give longer term bears the liquidity to cover their positions.

Below is an illustration of a head and shoulders bottom:

This is an outline of the inverse head and shoulders pattern. As you see, it is the mirror image of the head and shoulders topping pattern.

Identifying the Neckline in a Head and Shoulders Pattern

Every technical chart pattern has a trigger line, which provides confirmation for entering or exiting a trade.

For the head and shoulders pattern, the trade signal is called the neckline.

When you think about it, this name makes sense, because the neckline is directly beneath the head and shoulders. Get it?

When we identify the pattern on the chart, the first thing we should do is to draw the neckline.

So, how do we draw the neckline?

The proper way to set up your neckline is to connect the two peaks or troughs (depending on if it’s a top or bottom). Here’s an example with $CEI:

$CEI head and shoulders pattner example — $CEI head and shoulders pattern example

Please note the neckline isn’t always flat. If the peak or trough values are slightly different, then the neckline could have a slope.

We’ve tried to give you two examples of an early entry “Neckline A” and a later “Neckline B”. Both would work. It will depend on you and your style to outcome test head and shoulders chart patterns for the best entry.

What do Head and Shoulders Stock Patterns Foretell?

To determine the size of the formation, you should first set up the neckline as we just discussed.

Then, you take the mid-point of the neckline and draw a vertical line connecting the mid-point of the neckline to the top of the head. The distance between the neckline mid-point and the head is the distance we expect the stock to run after breaking through the neckline.

Please note, measuring price targets for head and shoulders and inverted head and shoulders will mirror each other. Again, the only difference is the formations are inverted.

How to Trade a Head and Shoulders Chart

When should you open a position?

When you identify the formation, you should start looking for the signal you need in order to enter the market. This signal is the moment when the price breaks through the neckline, for all intents and purposes.

When the neckline is broken, you should open a short position for head and shoulders tops and a long position for head and shoulders bottoms.

Granted, this is the old-school way to trade the pattern. Educators like Gil Morales teaches you to short into the pops on the right shoulder. He likes to find weaknesses into the overhead moving averages for good risk/reward.

If interested, he has a great book on short selling called Short-Selling with the O’Neil Disciples: Turn to the Dark Side of Trading.

Where should you place stop-loss orders?

This is a tricky question as traders’ opinions are pretty controversial regarding stop loss placement for the pattern.

Some traders claim that the stop loss should be loose and placed just above the head of the pattern.

A more conservative approach used by traders is to place the stop loss beyond the shoulder peak/trough.

We prefer placing the stop loss above the shoulder, as placing the stop above the head provides a 1:1 risk reward ratio. This isn’t very favorable odds.

When should you collect profits – Reverse Head and Shoulders Pattern Example 1

Again, the rule of thumb for this pattern is to determine the price target based on the depth of the pattern.

If this sounds confusing to you, have a look at the image below:

Price Target for Head and shoulders pattern — Price Target

This is a classic inverted head and shoulders scenario. This is the 30-minute chart of Apple. First, we have a bearish market followed by the creation of an inverted head and shoulders formation.

You can see the neckline – the brown line. Once the neckline is broken to the upside, we were able to set our price target based on the depth of the neckline to the trough of the head, which is represented with the black arrow.

After we establish our long position, we place our stop loss below the last shoulder as shown in the image.

After 24 hours, our minimum target is reached and we exit the position after the first bearish candle circled in green.

This inverted head and shoulders formation brings us a profit of $2.20 per share with the Apple equity.

While we exited this position near the target, you should not exit your position if the price continues to move in your favor.

Reverse Head and Shoulders Target Example 2

Having fun? Let’s go through another example.

Reverse head and shoulders Price target example 2 — Price Target

This is the 30-minute chart of Facebook.

After a strong downtrend, an reverse head and shoulders pattern develops. Again, we identify the neckline by drawing a brown line across the shoulders.

We open a long position with the first candle that closes above the brown neckline. Meanwhile, we establish our minimum target, which is illustrated with the black arrow.

After a few days, the price reaches our minimum target, but we stay with our long position until our bearish signal develops. For more information on bearish candlestick patterns as entry and exit signals, visit our guide to candlesticks.

A few hours later, a hanging man develops and we close our long position. From this long position, we were able to generate profits of ~ $4.00 per share.

When does the Head and Shoulders Pattern Fail

Although head and shoulders are considered one of the most reliable chart patterns for equity trading, like any other chart technique – it can fail.

Sometimes, we will receive our confirmation signal and the price does not reach our minimum target.

In other cases, the price will confirm the formation by breaking the neckline, and we will see absolutely no movement in our favor. These cases are not rare at all.

head and shoulders pattern failure — Pattern Failure

This is the 60-minute chart of Toronto-Dominion Bank. After a steady downtrend, an inverted head and shoulders formation develops.

We establish the neckline, price target, and stop loss, which are best practices for identifying the formation.

Unfortunately, after opening a long position, TD Bank begins to retreat below the neckline and ultimately trips our stop-loss order.

From this position, we accumulated a loss of ~52 cents ($0.52) per share. Although all the symptoms of an effective pattern are there, things didn’t work out.

This is why it is important to respect your stops!

Day Trading Head and Shoulders Tops

The first thing to consider when day trading this pattern is that it requires time. Unless you are on sub-minute charts or tick charts, you will likely need two days worth of bars or an early afternoon set up for the formation to fully develop.

Like any other trading setup, you will need more than just the chart pattern to be a success. Some of these items include proper money management and a firm understanding of risk on each trade.

Back to an intraday example, check out this head and shoulders chart of RPM.

Intraday Top on RPM — Intraday Chart Example

You can see the setup is the same as all the other charts previously discussed, even though the chart is on a 5-minute time frame.

The key point, again, is that you will need to let the trade setup. It’s not like an opening range breakout with 4 or 6 candles after a major gap. It takes time.

This pattern requires you to let the trade come to you, which takes extreme patience. The positive is that the reward from the trade is significant because the “cause” built up before the move creates a large “effect,” typically. There are many traders on both sides of the trade placing real money on the line.

The key is, after the break of the neckline, managing the trade properly. This means placing your stop above the recent peak or trough point. Also, it means adding to the position as it goes in your favor, all while managing a core position.

Key Summary Points on Head and Shoulders Chart Patterns

Head and shoulders tops and bottoms are reversal chart patterns.
It is one of the most reliable technical formations.
Inverted head and shoulders can reverse a bearish trend to bullish.
You will need to identify the formation, neckline, and stop loss levels.
Open a position when the price breaks through the neckline.
Advanced/Early entries can be taken on pops into the moving averages on the right shoulder
Place a stop loss order on the edge of the last shoulder.
The price target for the formation is equal to the depth of the neckline to the head of the formation.
When the price target is met, stay with the position until a contrary signal develops.
The pattern can fail, so don’t get too sure of yourself.
Use a global news source to understand the financial impacts outside of your market which can impact the trade.

How Can TradingSim Help

As with any strategy, we never recommend putting your money to work without testing the setup first. Ideally, you’ll want a set of as many simulated trades as possible in order to know your probability for success.

In other words, don’t take our word for it. Jump in the sim, scan for reversals both long and short, and track them in the analytics page. This way, you’ll know ahead of time what your realistic outcome expectancy can be.

Along the way, be sure to study which areas provide the best points of entry for your specific head and shoulders pattern strategy.

Here’s to good fills!

The descending triangle pattern is a type of chart pattern often used by technicians in price action trading. The pattern usually forms at the end of a downtrend or after a correction to the downtrend. However, it can also occur as a consolidation in an uptrend as well.

Chart technicians can make use of the descending triangle pattern in order to trade potential breakouts.

Bearish or Bullish?

Contrary to popular opinion, a descending triangle can be either bearish or bullish. Traditionally, a regular descending triangle pattern is considered to be a bearish chart pattern. However, a descending triangle pattern can also be bullish. In this instance it is known as a reversal pattern.

To that point, the descending triangle can be viewed as either a continuation pattern or a reversal pattern. The triangle continuation pattern is your typical bearish formation. This pattern occurs within an established downtrend.

On the other hand, a descending triangle breakout in the opposite direction becomes a reversal pattern. Considered the opposite of the ascending triangle, this pattern is also known as the bearish triangle descending pattern.

A very important fact to bear in mind when trading the descending triangle is that it is very subjective. Therefore if you are new to trading the descending triangle stock pattern, you need to have a lot of practice. Familiarizing yourself with it in the simulator will allow you to build your own custom triangle trading strategies.

Characteristics of the Descending Triangle

The classic version of this pattern forms with a trend line that is sloping and a flat or a horizontal support line. The pattern emerges as price bounces off the support level at least twice. The completion of the pattern occurs after the end of a retracement in a downtrend.

The downside breakout from the support triggers a strong bearish momentum-led decline.

However, this textbook pattern seldom occurs in the real markets. In most cases, a descending triangle pattern can also see a sloping base as well. Instead of a flat support level, you can see higher lows being formed.

The illustration below shows an “ideal” descending triangle pattern, which is often labeled a descending wedge, as well.

Example illustration of a classic descending triangle pattern

Typically, the breakout from a descending triangle is triggered to the downside. The distance from the support to the first high is measured. This measured distance is then projected to the downside where the target price can be set.

However, not all descending triangles breakout to the downside. You can also see an upside breakout from the descending triangle. In this case, it becomes a continuation pattern instead of a reversal pattern.

The same concept of measuring the distance from the support to the first high is used to determine targets. This is then projected to the upside for the minimum price objective.

In the next section of this article, we illustrate five descending triangle trading strategies that can be used.

1. The Descending Triangle Breakout Strategy

As the name suggests, the descending triangle pattern breakout strategy is very simple. It involves an anticipation of a breakout from the descending triangle pattern. This strategy uses a very simple combination of trading volumes and asserting the trend, which can be used to capture short term profits.

The first step in trading this strategy is to pick a stock that has been in a downtrend or in a consolidation phase. The time frame of the chart is irrelevant as you can use this strategy across any time period. Once you have identified a stock and the time frame, wait for price action to contract.

Be sure to allow for some flexibility in charting the patterns. Simply watch for lower highs and lower lows being formed. Once you have identified this price action, the next step is to draw or chart the descending triangle pattern.

The basic premise of using this strategy is to look at volume once you’ve identified the pattern. You can typically observe that volume begins to diminish toward the end of the descending triangle pattern formation.

The chart below shows an example of the Microsoft (MSFT) daily stock chart. In the chart, you can see that the triangle pattern was formed after price action was trading sideways. After a brief consolidation, price falls lower before breaking out from the pattern.

Descending Triangle MSFT — Descending triangle pattern breakout strategy

Volumes are usually lower closer to the breakout. Once you identify the lower volume, simply measure the distance from the first high and low. Then you project the same from the breakout area which becomes your target price. We show this with the dotted lines on the chart above.

This simple volume based descending triangle pattern is easy to trade but requires lot of time to watch the charts.

2. Descending Triangles with Heikin Ashi Charts

Using Heikin Ashi charts along with the descending triangle pattern you can develop a powerful but simple trading strategy. Heikin Ashi charts visually stand out compared to the conventional chart types.

One of the main characteristics unique to Heikin Ashi charts is the fact that they can depict the trend easily. Most traders often struggle when it comes to identifying the trend. You can resolve this confusion by switching to Heikin Ashi charts.

In this strategy, traders simply need to wait for the descending triangle pattern to be formed. Once the pattern has been identified, the next step is to wait for the bullish trend to pick up. In most cases, you will find that the Heikin Ashi candlesticks turn bullish prior to the breakout. This can be used as an initial signal to prepare for long positions in anticipation of a breakout.

The next chart below shows the Heikin Ashi chart for Alcoa (AA) on the 60-minute time frame. Notice that, prior to the breakout, the Heikin Ashi candlesticks turn bullish.

Descending triangle with Heikin Ashi candlesticks

Making Price Target Projections

The projections are based on the same strategy as before. Measure the distance from the first high to the first low and project the same from the anticipated breakout level.

Wait for the breakout from the descending triangle pattern. Initiate a long position after the first bullish Heikin Ashi candlestick. Then, project the measured distance from the breakout to get the target price.

Depending on your charting platform, you will notice that volume bars also change. This is because they reflect the bullish/bearish sentiment based on the Heikin Ashi candlesticks. Volume bars serve an additional purpose to alert you to a potential bullish breakout.

This descending triangle strategy with Heikin Ashi charts is effective to trade in the short term.

3. Descending Triangle with Moving Averages

Traders and intraday speculators can also combine price action techniques and chart patterns with technical indicators. Moving averages are one of the oldest and simplest of technical indicators to work with.

It is important to note that in this trading strategy we use the descending triangle pattern to anticipate potential breakouts. Along those lines, the moving average indicators serve the purpose of triggering the signal to initiate a trade.

In the following example, we use a 60-minute stock chart for General Motors (GM). We use a 10 and 20 period exponential moving average. Traders can experiment with their own settings on the period of the moving average; this depends on the time period that you use. For example, for a daily chart time frame, you can use the 10, 20 or 20 and 50 period settings.

Also note that using small periods (less than 10) could make your moving averages more sensitive to noise.

Descending triangle with moving averages

The above chart shows the 10 and 20 period EMA applied to the chart for GM. Notice that prior to the break out, the moving averages signal a crossover buy. The moving averages can be a great source to alert you when to initiate a trade.

There is no need to make use of volumes when trading with this strategy. Also note that you will not always see a bullish signal from the EMA’s prior to the breakout. After you get a bullish EMA signal and a breakout, it is an ideal signal to trade.

Projections and target price level methods remains the same as outlined in the initial strategy.

4. The Descending Triangle Reversal Topping Pattern

You can identify the descending triangle reversal pattern at the top end of a rally. This pattern emerges as volume declines and the stock fails to make fresh highs. The pattern indicates that the bullish momentum is exhausting. At the same time, price action forms a horizontal support level.

After price bounces off the support level multiple times, posting lower highs, we can anticipate a potential downside breakout. The minimum distance that price moves prior to the breakout is measured from the initial high. This distance is projected lower after price breaks out below the support level.

The descending triangle reversal pattern can be very easy to trade if you spot the pattern ahead of the breakout.

The next chart below illustrates the descending triangle reversal pattern in play. The stock chart for Morgan Stanley (MS) shows that after a strong rally, price stalls near the highs. Notice the support level that also stands out.

The Descending triangle reversal pattern at top

The resulting bounce off the support level leads to a lower high. Following this, price breaks down below the support with strong momentum. As you can see, the minimum measure distance is nothing but the project from the initial high.

5. Descending Triangle Reversal Pattern at Bottom

The descending triangle reversal pattern at the bottom end of a downtrend is the direct opposite of a distribution event. In this case, you will find that price action stalls at the end of a downtrend. A horizontal support level marks a bottom in price.

Multiple attempts to the upside lead to lower highs. Subsequently, price action eventually breaks to the upside from the descending triangle reversal pattern at bottom. Unlike the strategy mentioned previously, in this set up, you can trade long positions.

Traders can anticipate a potential upside breakout and trade the pattern accordingly.

Descending triangle reversal pattern at bottom

In the above chart set up for Goldman Sachs (GS), you can see how price fell to the lows, establishing support. The horizontal support level holds the declines where the bounce off the support level leads to lower highs.

Eventually, price action breaks out from the sloping trend line. Measure the distance from the horizontal support to the initial high and project this distance from the breakout level. The projected distance becomes your target price level.

Tips when Trading the Descending Triangle Pattern

Subjectivity is essential when trading the descending triangle pattern. Traders who wait for the “classic” descending triangle pattern will often find themselves on the sidelines.

Familiarity and experience are the best ways to trade, and that can only come through practice.

Keep in mind that the descending triangle pattern is also know as a measured move chart pattern. A measured move chart pattern is when you measure the distance and project the same from a breakout.

Many other trading strategies can blend well with the descending triangle chart pattern. It fits perfectly well within an investor’s buy and hold strategy. The triangle pattern also works with technical analysis which can complement the fundamental analysis as well.

In conclusion, the descending triangle pattern is a versatile chart pattern which often displays the distribution phase in a stock. Following a descending triangle pattern, the breakout is often swift and led with momentum. This can lead to strong results when one becomes familiar with the trading strategies outlined.

Candlestick patterns can have some crazy names sometimes. Stars, dojis, and abandoned babies? The Japanese were fond of naming candlestick patterns after real-life visual representations. Shooting stars, morning stars, evening stars and abandoned babies are all examples of indecision reversal candle patterns. We’ll introduce you to them in this post.

If you haven’t checked out our complete explanation of candlestick patterns, be sure to do so. In it, we cover the construction of a candlestick chart, the history of candlesticks, and common candlestick reversal patterns. It also has a link to a free cheat sheet that includes the stars, dojis, and baby patterns.

What are Candlestick Stars?

As noted above, stars are a type of indecision candle. Typically we want to trade them as a powerful reversal pattern. But as with all candlestick patterns, context is everything.

Types of Candlestick Stars

The key rule to a star is that its real body does not overlap the previous candles real body. There are several variations of the star pattern:

morning star
evening star
doji star
shooting star

The Body

Stars will typically have a small body. This is particularly important for psychological reasons which we’ll get into in a moment. But for now, suffice it to say that stars usually open and close very tightly.

Of course, these candles can appear anywhere on a chart. With the examples below, we’ll teach you the proper context where they should appear for profitable reversal patterns.

Exhaustion Gaps

On a daily chart, the Candlestick Stars will typically appear with a gap at the highs of an extended run, or the lows of an extended sell off. This is the key to the reversal patterns

Candlestick Stars will typically be associated with increased volume at these climactic ends as well. This also is part of the psychology of the pattern.

Psychology of the Candlestick Star Pattern

As a star has a small real body, it represents indecision by bulls and bears.

How so?

Think about it this way:

When a stock is trending upward aggressively, strong hands and institutions will be selling into that strength. Meanwhile, retail traders may be buying here unaware that the stock is about to turn.

Likewise, because the stock is so extended, short sellers will be initiating their positions as well, adding more supply to the stock.

As all of this occurs at once, we get a star candle that can’t seem to make up its mind on moving higher or lower. A lot of activity, but not much movement in either direction. That is, until the next candle.

While the primary trend is still intact, the presence of the star is the first sign that the trend could turn. Think of it like a crossroads.

It is the second candle that will tell us whether the reversal pattern is confirmed or not.

Candlestick Star Variations

Morning Star

The morning star candle is a bottom reversal signal that comes after an extended downtrend.

This pattern is a three candle reversal setup. The first two bars are the typical star setup discussed above. The major difference with this pattern is the third candle in the formation.

It is a very strong green candle, which does not have to be a gap and closes at least halfway into the first candle.

Assessing the Strength of the Morning Star Signal

The further the green reversal candle closes into the first bar (the red bar preceding the star), the more bullish the formation.

On that note, outside of the morning star candlestick pattern revealing itself, look for other indications that this pattern is confirming. For example, you want to see high volume in the third candle, indicating strength.

Additionally, the morning star works very well when it occurs at previous support levels. The more criteria you can find, the better.

On the other side of the coin, if you buy a stock that prints the morning star, be prepared for some sort of pullback.

It is not uncommon for that to happen nearly 50% of the time. If there is a violation of the lows, then the morning star is failed.

Let’s take a look at the morning star candlestick at work with a live trading example.

Morning Star Trading Example

This is a beautiful morning star setup.

First of all, the morning star came in at previous support near the 60.37 level. The star candle came in the form of a hammer.

Refer back to our Candlestick Guide to learn more about the hammer.

There was high volume that came along with the hammer, and this was an even bigger sign that this level would hold as support. The following day, the stock accelerated with a gap higher and closed well into the top half of the first bar.

As mentioned earlier, the presence of this pattern does not indicate an immediate rally. As you can see, the gap created from the second to the third bar was backfilled.

Smaller gaps, such as this one, tend to fill in the short term. Even if one had waited for the high of the third candle in morning star to be broken above, five points could have been made in that short amount of time.

Evening Star

The evening star candlestick is the bearish version of the morning star.

It is a top reversal pattern that occurs after a sustained uptrend. The evening star is also a three candle pattern.

Evening Star Formation

The first candle is a strong bullish candle. The second candle is the star, and the third is a red body that closes well into the first candle.

Again, as with the bullish morning star, the third candle in the evening star does not have to be a gap.

Here are a couple of factors that increase the chances of this pattern succeeding:

The real bodies of all three candles do not overlap
The third candle closes well into the first one; preferably regaining 75% of the candle
Volume should lighten up on the first candle and increase on the third.

Just as the lows of the morning star pattern provide support, the highs of the evening star candle formation serve as resistance to any further upside movement.

Doji Stars

A candlestick doji pattern is a candle that lacks a real body. This means the open and close of the bar are essentially the same. It has a strong significance after substantial advances or declines.

The lack of direction is a potent reversal signal, especially if it is followed by a candle in the anticipated direction, and at the end of a trend.

When a doji is the star within the morning star and evening star candlestick patterns, the formations are known as the morning doji star and evening doji stars.

Notice, the Evening Doji star image above is an abandoned baby top, while the morning doji star is not. We’ll explain why below.

Abandoned Baby Candle

Another extremely powerful version of the doji star is the abandon baby top or abandon baby bottom. This pattern is the equivalent to what some know as the island reversal.

The abandoned baby candlestick has a doji as the second candle with a gap on both sides.

If you think about the psychology of this setup, the first gap came in an exhaustive fashion.

The stock was already in a strong uptrend or downtrend, and then it made a gap which closed near its open. This was the first sign that the directional pressure was fading.

Now, with the third candle gapping in the opposite direction of the trend, we have confirmation that a more significant trend reversal has taken place.

The Shooting Star

Shooting Star Candlestick Pattern — Shooting Star

The final star variation we will discuss is the shooting star, which occurs after a strong uptrend (or the inverted hammer that occurs after a strong move down).

The shooting star has a long upper shadow with a small real body at the lower end of the candle. This pattern usually presents itself as a sign of a short term correction rather than a more potent reversal signal.

Along those lines, it is telling us that the market’s rally could not be sustained. The market opened at or near its lows, shot up much higher and then reversed to close near the open.

The Body

Ideally, the real body of the shooting star should gap away from the previous candles’ real body. While it is not necessary, it adds confirmation to the validity of the impending reversal.

Why? Again, it all has to do with exhaustion in either direction.

Additionally, take a look at the previous candles; many times you will see overhead shadows on those candles as well. This indicates that the stock is struggling to go higher; just another clue as to what might happen.

When a shooting star forms near a resistance level, a very powerful resistance level is created.

As mentioned before, the shooting star is a short term topping formation, and any break above the high of this candle is a failed confirmation.

Variations

There is one variation to the shooting star you should consider; it is known as the gravestone doji. The gravestone doji is a shooting star with virtually no real body, the open and close are exactly the same.

This formation is more powerful than the typical shooting star and portends a more serious reversal.

Summary

Candlestick patterns are a great way to assess the trend of a stock. The key to its secret is the fact that candlesticks are a visual representation of price action.

These reversal candles can help the astute trader anticipate a trend change or continuation. Just remember, you need other validation points. These can come in the form of a technical indicator or other chart patterns.

How Can Tradingsim Help?

You can use Tradingsim to scan the markets and locate these candle reversal patterns. You can then apply your own trading strategy to find the optimum setups for profits.

Work on developing your own specific rules for entries, stops, and targets.

As always, be sure to ask yourself the following questions when practicing any setup:

what qualities work for each particular setup
what criteria were met, or not met
how was volume associated with the pattern
where could you have set your risk and profit target
how many of your trades worked or didn’t work

The Three White Soldiers pattern is a popular bullish candlestick pattern. It is fairly easy for most traders to spot in real time given the 3 large range successive candles. Moreover, in the right context it can signal a reversal of a trend. In this post we’ll discuss the context, requirements, and a free video on how to trade this pattern.

If you aren’t familiar with candlesticks in general, be sure to check out our Candlestick Pattern Guide. In that post we’ve put together a free infographic cheat sheet for you to use with your trading, along with many bullish and bearish examples!

Three White Soldiers Video Tutorial

Our in house trading expert, Al Hill has put together a quick video explaining the pattern. Have a look before you get started with the tutorial.

Overview

The three white soldiers is a Japanese candlestick pattern that is comprised of three or more bullish candles. ^[1]

The candles are white because positive price movement in eastern technical analysis is represented white and not green (as most charting platforms default to these days).

The reference to soldiers is in the context of the battle between the bulls and bears. Visually, they are marching forward with no impediment.

3 Requirements for Confirmation

Now that you have the image of the three white soldiers candlestick pattern in your mind, hopefully you’ll begin to see the pattern on your charts more often. Sometimes studying candlestick patterns can be a lot like listening to a new song, it gets stuck in your mind.

But not every sighting of a pattern is tradeable.

With most candlestick patterns, one trader may see a bullish setup, while another may see bearish signs. For this reason, it is imperative to qualify the context of the candlestick patterns before making a trade.

Next, we will dive into three clear requirements you should look for when the candles present themselves on the chart.

1st Requirement – Three Bullish Broad-Range Candles

The first rule for the pattern is that you need clean candles with decent size. By clean, we mean without a lot of selling pressure. Ideally, you don’t want long upper or lower wicks.

These candles all need to finish in the positive and the candles cannot breach the low of the prior candlestick. For reference, please see the above image.

Next, the candles need to be healthy in size, where the open is essentially the low of the period and the candlestick closes near its high. The price advancement for each candle should be considerable compared to other candles on the chart

We aren’t looking at a doji or narrow body candle here.

In the right context, this suggests ease of upward movement. A bullish sign.

2nd Requirement – Formation at the End of a Bearish Move

This requirement is a bit more subjective and tougher to identify. You essentially need to identify weakness in a stock and then the three white soldiers show up to the rescue.

Contextually, it can come when there is a lack of supply in the market after a heavy sell off, signaling a big reversal. Short covering can fuel the Three White Soldiers off the lows.

This can occur after a clear bear trend down or after a stock retreats to the bottom of a trading range.

3rd Requirement – Heavy Volume Signature

This one is not discussed as often, but you need to see volume in the setup to validate its strength. ^[2] If you encounter three white soldiers that are on light volume this could mean there was a handful of weak retail traders that jumped in too soon.

Without volume this pattern has a higher probability of rolling over, thus stopping you out of your position.

Three White Soldiers Chart – Example 1

In the first chart example, we’re reviewing the symbol SBAC. One of the first interesting points is that the stock has a sharp move upward at the open and then immediately rolls over.

Out of this weakness, SBAC then prints Three White Soldiers. This was an indication that the weakness had subsided and the stock would then attempt to develop some sort of base.

The one issue with this particular setup is the volume. As we stated earlier, the volume must accompany the setup in order for the signal to carry real weight.

The light volume in the Three White Soldiers pattern for SBAC did not ruin the trade as the stock was able to make a run for the daily highs.

However, the stock topped out at that point and developed a range.

So, in this example, while SBAC did not roll over, the stock also did not make the sizeable move we would have hoped for with this setup.

Three White Soldiers Chart – Example 2

In this example, do you see how MTN sold off the entire day? The stock had a high volume down event followed by three white soldiers. Yet again, the volume did not follow through with the soldiers.

So, what happened next?

The stock had a minor pop back up to the downtrend line only to drag lower into the close.

Are you starting to see a trend with weak volume?

That’s right, sometimes the soldiers may print on the chart, but these are not always your front line heroes.

Three White Soldiers Chart – Example 3

Now that the failed examples are out of the way (it is always good to have a healthy does of skepticism with any pattern), let’s turn our attention to a Three White Soldiers formation that works out nicely.

After a steep selloff into a support zone, DK prints three white soldiers with decent volume and the stock shot back up to the most recent swing high.

Three White Soldiers Chart – Example 4

We’ll save the best for last. In this example, EYES is trending upward from a consolidation in the morning. Now that it is above its prior resistance, we get a little pullback in the price action — just enough to suck shorts into the trade.

Once shorts are getting nice and cozy, bulls come with a vengeance to reclaim their trend.

Like the other examples, note the massive volume signature on these Three White Soldiers marching to new highs.

This particular stock ran another 400% from this point. So you can see that context is everything.

Why The Three White Soldiers Candlestick Pattern Is Difficult To Trade

Everything you have read on the internet probably praises this formation and the power of its trend forecasting capabilities. And it can be a great pattern for that reason, no doubt.

However, depending on your trading style, you may find this pattern difficult to trade for a few reasons shared below.

1. Difficulty Buying Selloffs

Many traders do not like to buy selloffs or stocks floating lower. You may have heard of the old adage, “don’t try to catch a falling knife?” Well, this is no different.

Trying to time the bottom can be difficult and risky, you never know when the stock could flush lower, stopping you out. Or even worse, stopping you out with a horrible fill.

2. Risk Is Too Wide

The difficulty with buying the Three White Soldiers is that they are very wide bodied candles. As you notice from the examples above, waiting for the last soldier to form may create an emotional hurdle if you plan to set your risk at the low of the day.

If you were to buy three white soldiers at the confirmation of the last candle, that’s three really large candles to set a stop against. It’s simply too much risk in the trade relative to the profit potential on the upside.

As a consolation, if the pattern is extremely bullish with accompanying volume, you might decide to put your stop at the low of the last soldier candle. This could be a work around for the risk issue.

Otherwise, you might wait for a pull back to retest the demand in these three candles and take your long position there.

3. Buying The Pullback May Not Work

Those of you familiar with the setup will say, “well, duh, don’t buy the break of the third candle.” As mentioned above, you could just wait for a slight pullback on light volume after the three white soldiers develops.

Perhaps buy a 50% retracement from the high of the pattern, if you get that.

This doesn’t always work. As you can see with the EYES example above, we never got that retest.

However, the silver lining in the EYES example is that we did retest the high of the third soldier candle two times, and both times held the new trend well.

EYES holds support at the Three White Soldiers

Again, the key is context and the ability to set risk according to the potential profit you might make in the trade.

An Alternative Buy Point

Experienced traders prefer their patterns to start and move with a sense of urgency. For this reason, you could initiate a position into the runup of the three white soldiers, adding as volume confirms.

This is more of an anticipatory strategy if you sense heavy demand in the tape or Level II. After the completion of the formation you can make a decision to add or cut the trade depending on the context.

How To Practice the Three White Soldiers

If you are contemplating trading the three white soldiers pattern you can practice identifying the setup within a simulator by replaying tick data for over 11,000 symbols for the last 3 years.

You can then work on developing your own specific rules for entries, stops, and targets.

As always, be sure to ask yourself the following questions when practicing any setup:

what qualities work for each particular setup
what criteria were met, or not met
how was volume associated with the pattern
where could you have set your risk and profit target
how many of your trades worked or didn’t work

For more information on candlestick patterns, please check out our free technical analysis section devoted to these great trading tools.

External References

The doji candlestick is one of the most common candlestick reversal patterns you will find in the market. The Gravestone Doji is a variation of this reversal pattern. When correctly confirmed, the Gravestone Doji can lead to great opportunities for profit in day trading.

In this post, we’ll cover how to trade the Gravestone Doji with real examples, plus strategies on how to enter trades and manage risk based on this popular indicator.

7 Steps to Graveston Doji Trading Success

How is the Gravestone Doji Formed

The Gravestone Doji is a candlestick bar whose open, low, and close all culminate at the low of the bar.

Bearish Gravestone Doji Japanese candlestick pattern

As the name implies, imagine looking at the side profile of an actual gravestone. Hence the long upper wick and the narrow base at the bottom reflect what a gravestone would look like from the side. The Japanese were fond of naming candlestick patterns for their likeness in real-life.

You might also say that a Gravestone Doji represents the gravestones of the bulls that have died defending their territory.

As mentioned, the Gravestone Doji is a bearish trading setup. For this reason, its success rate is greatly increased when the candle forms at a market top.

Its bullish counterpart is the Dragonfly Doji. We cover this pattern in another post.

The psychology behind the candle is that the bulls were in control in the beginning. They drive the price of the security up to an unsustainable level. From there, the bears take control and are able to sell the security down to its low by the end of the session.

Contextually, when this occurs at the highs of an extended uptrend, we interpret this as exhaustion. This gives us the confidence to take a short position when all criteria are confirmed.

Charting Example of Gravestone Doji

Now that you have an understanding of the setup, let’s review a real-life chart example.

Bearish Reversal Doji Candle Example — Bearish Reversal Candle Example

Above is a classic Gravestone Doji at the end of an uptrend.

Showing up this late in the uptrend, it was an early sign that the bulls were losing control and a price drop was likely on the horizon.

Once the bears took control, this led to heavy selling on high volume.

Our job as traders is to use these price analysis tools to help us take advantage of opportunities like this.

While this first example covers a bearish reversal setup, we can find some examples as continuation patterns. It is essentially the same as a reversal, just on a smaller rally.

Bearish Doji downtrend continuation pattern — Bearish doji downtrend continuation pattern

Note the attempt to rally here, only for bears to quickly reassert their dominance in the downtrend. Markers like this can offer opportunities to add to short positions with confidence as you manage the down-trending trade.

Trading the Gravestone Doji

Now that we have covered the basics, let’s dive into a trading example.

It is important to mention that the risk management rules for this strategy will vary due to the size of the wick. We will cover this in more detail shortly.

Entering a Gravestone Doji Trade

Whenever you see a Gravestone Doji appear in the context of a bullish uptrend, this should give you reason to pause as the trend reversal could come at any time!

Once you identify the candlestick pattern, you will want to find a trigger that lets you know when to enter the trade.

A simple trigger is the low of the candlestick. Once a candle closes below this level, you can open a short position.

Bearish Gravestone Doji Trigger Line — Doji Trigger Line

In the image above, we outline the trigger line that shows the exact moment when you should short the stock after identifying the doji candle.

The reason you want to wait for a close below that line is clear. We see a slight hesitation comes on the next candle, which is relatively small and doesn’t manage to break the trigger line.

What if this had continued higher?

Let’s look at the example from above one more time to see when that might occur:

This image has an empty alt attribute; its file name is image-31.png — Bearish Reversal Doji Candle Example

Notice that the first reversal doji gives us a false confirmation. We never close below the candle. It is the second doji that puts the nail in the coffin, no pun intended.

Thus, the short signal comes on the second candle after the doji with a break and close below the trigger line.

Risk Management when Trading the Gravestone

When you trade the Gravestone Doji, you need to determine where to place your stop loss order.

Like any other setup or trade formation, you always need to protect your capital.

The proper location of a stop loss is above the high of the Gravestone Doji candlestick.

The one caveat, as we mentioned earlier, is that for each Gravestone Doji, your level of risk will vary depending on the length of the candlestick wick.

Doji Trade Stop Loss and Trigger Line — Bearish Gravestone Doji with Stop Loss and Trigger Line

This is the same sketch from above. However, this time we have added the location of the stop loss order.

Pretty straight forward right?

Profit Targets for the Gravestone Doji Pattern

Please remember that without a target for when to exit a trade, you will find it extremely difficult to turn a profit.

For this particular candelstick pattern, we have devised a method for how to set profit targets for when to exit the trade.

Doji trade example with Profit Targets — Bearish Gravestone Doji with Profit Target

Ideally, we want to have our reward be at least double our risk. For that reason, here is a simple calculation:

The fist profit target equals the size, or range, of the doji candle. This would give us a roughly 1:1 reward/risk ratio. Not ideal, but at least we can lock in some profits.

The second profit target is double the size of the gravestone doji. This will get us closer to a 2:1 reward/risk ratio. Much better.

You will need to determine which profit target to use based on the volatility of the chart and the range of the Gravestone Doji wick.

Risk Management after Reaching Target 1

When the price reaches the first target, you can either decide to exit the trade, or wait to see if target two is reached.

A simple method for protecting your portfolio if you want to chase the big gains is to move your stop to breakeven after the first target is reached.

If you find yourself emotional, take a small portion like 1/4 of your position and bag those profits. This way, if you move your stop lower, you’ll never be red on the position, giving you patience to let it work.

Trading with the Gravestone Doji Candlestick Pattern

Now that we’ve summarized all the basic rules required to trade the Gravestone Doji candle, we will now cover a few real-life trading examples.

Example 1

Above is a 2-minute chart of AT&T intraday.

The trend is upward with a last push to increase price only to close lower. The result is a Gravestone Doji reversal candlestick.

The next candle after the doji breaks the trigger line, therefore we open a short position.

Our stop loss should be placed above the high of the gravestone doji to ensure we protect ourselves if the trade goes against us.

For this example, we are going to go with twice the size of the Gravestone Doji as our profit target.

Eight minutes later, AT&T reaches our initial target. At this point we could exit the trade and book our profits. The other option is to wait for a further price decrease and exit the trade later.

Profit targets will vary for different traders. Here at Tradingsim, we like to exit at the profit target. Our reasoning is that the stock market moves extremely fast, and you may not have the luxury of waiting on a bigger move.

In addition, there is the psychological strain of always wanting more, but never quite getting all of a move.

Of course, this can depend on the bigger picture and how oversold the stock is on multiple time frames. In this case, it may be worthwhile to wait for lower lows.

Patience can pay off sometimes, just don’t let the trade become a headache.

From our example above, once you wait for more, AT&T reversed and moved higher only to stop us out of the position.

Let’s now take a look at another trading example.

Example 2

This is the 2-minute chart of Visa. The image shows another Gravestone Doji trading example; however, this time the results are more favorable than our first trading example.

The price action is very similar to our last trading example, but in this case the stock does not reverse after hitting our target, but rather continues lower.

Patience paid off.

Our initial target is located at a distance equal to twice the size of the doji pattern — shown by the blue line. This gives us a 2:1 Reward/Risk ratio, or “2R”.

While the price reaches our initial target on the chart after 6 minutes, we adjust our stop loss and hold the position in hopes of more profits.

Ultimately, we were correct and the price breaks down further to make new daily lows. We exit the trade after we see two bullish candles in a row, our signal to exit.

We nearly doubled our profits!

Tutorial Review

Let’s review a few bullet points on how to spot the Gravestone Doji pattern and trade it with success:

The Gravestone Doji candlestick pattern is a reversal formation, which usually comes at the top of a bullish trend.
The psychological factor behind the pattern says that the bulls bring the equity to an unsustainable level, where the bears take over.
Visually, traders say that this pattern symbolizes the side profile of a gravestone for the bulls.
You should short the stock when a candle closes below the tiny body of the Gravestone Doji.
A stop loss should be used for every gravestone doji. This stop loss should be placed above the highest point of the candlestick.
You have two options for setting profit targets when trading the gravestone doji:
1. Seek a price move equal to the size of the formation. I recommend this for longer gravestone doji candles.
2. Pursue targets equal to twice the size of the gravestone doji. This is a better option when the doji candle is smaller.
After your initial target is reached, be patient if the stock keeps trending in your favor. But follow these two simple rules:
1. Adjust your stop above the initial target.
2. Stay in the trade until you see two bullish candles in a row. This hints that the bearish move might be over.

How to Practice the Gravestone Doji

As with any pattern or strategy in the stock market, it takes time and effort to recognize them in real-time.

We recommend trading in a simulator with at least 20 successful attempts on this bullish reversal pattern before employing real money in the market.

Once you have your dataset, you can measure your success. Then you will have confidence to take the trade knowing your ratio of wins to losses!

The Head and Shoulders Pattern: How to Trade Tops and Bottoms

What do Head and Shoulders Chart Patterns Look Like?

What Do Inverse Head and Shoulders Chart Patterns Look Like?

Identifying the Neckline in a Head and Shoulders Pattern

What do Head and Shoulders Stock Patterns Foretell?

How to Trade a Head and Shoulders Chart

When should you open a position?

Where should you place stop-loss orders?

When should you collect profits – Reverse Head and Shoulders Pattern Example 1

Reverse Head and Shoulders Target Example 2

When does the Head and Shoulders Pattern Fail

Day Trading Head and Shoulders Tops

Key Summary Points on Head and Shoulders Chart Patterns

How Can TradingSim Help

Bearish or Bullish?

Characteristics of the Descending Triangle

1. The Descending Triangle Breakout Strategy

2. Descending Triangles with Heikin Ashi Charts

Making Price Target Projections

3. Descending Triangle with Moving Averages

4. The Descending Triangle Reversal Topping Pattern

5. Descending Triangle Reversal Pattern at Bottom

Tips when Trading the Descending Triangle Pattern

What are Candlestick Stars?

Types of Candlestick Stars

The Body

Exhaustion Gaps

Psychology of the Candlestick Star Pattern

Candlestick Star Variations

Morning Star

Assessing the Strength of the Morning Star Signal

Morning Star Trading Example

Evening Star

Evening Star Formation

Doji Stars

Abandoned Baby Candle

The Shooting Star

The Body

Variations

Summary

How Can Tradingsim Help?

Three White Soldiers Video Tutorial

Overview

3 Requirements for Confirmation

1st Requirement – Three Bullish Broad-Range Candles

2nd Requirement – Formation at the End of a Bearish Move

3rd Requirement – Heavy Volume Signature

Three White Soldiers Chart – Example 1

Three White Soldiers Chart – Example 2

Three White Soldiers Chart – Example 3

Three White Soldiers Chart – Example 4

Why The Three White Soldiers Candlestick Pattern Is Difficult To Trade

1. Difficulty Buying Selloffs

2. Risk Is Too Wide

3. Buying The Pullback May Not Work

An Alternative Buy Point

How To Practice the Three White Soldiers

External References

How is the Gravestone Doji Formed

Charting Example of Gravestone Doji

Trading the Gravestone Doji

Entering a Gravestone Doji Trade

Risk Management when Trading the Gravestone

Profit Targets for the Gravestone Doji Pattern

Risk Management after Reaching Target 1

Trading with the Gravestone Doji Candlestick Pattern

Example 1

Example 2

Tutorial Review

How to Practice the Gravestone Doji