Tag: Reward

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.

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

1. Three White Soldiers. Wikipedia
2. Three White Soldiers. candlescanner.com