In Japanese candlesticks, there are some patterns that are called secondary signals because they do not arise as frequently as the more common bearish or bullish engulfing patterns, bullish or bearish harami patter, hanging man or hammer patterns. We deal with two such patterns in this column — three white soldiers and three black crows. These patterns can be used for confirmation of market trend and sentiment.
The three white soldiers pattern consists of three consecutive white real bodies, each with a higher close. This pattern should occur in a downtrend, signifying bullish reversal formation. Each candlestick should open within the previous real body and it should close above the previous day’s closing price. Generally, upper and lower shadows are absent or small. Traders make use of this pattern to confirm a change in momentum and an alteration in the sentiment of investors from bearish to bullish. The length of the candlestick helps in reinforcing the reversal implied by the pattern. The longer the candles, the more spectacular the reversal. Secondly, higher each consecutive candle opens compared to the previous candle, stronger the chance of a sustained reversal.
The daily chart of Pantaloon Retail illustrates a three white soldiers pattern. The stock reversed it down trend in March 2007 by forming the three white soldiers pattern. The stock has been on a steady rally since then. The three black crows pattern consists of three consecutive black real bodies, each with a lower close. This pattern is a three candle bearish reversal pattern formation that occurs in an uptrend. It is the opposite of three white soldiers pattern. These black candles should open within the previous real body and it should close below the previous day’s closing price.
Usually, upper and lower shadows are absent or small. Traders make use of this pattern to confirm that the uptrend has ceased and the bears have taken control. The daily chart of Parsvnath Developers shows three black crows pattern