History is silent about the exact date, but it is known that approximately from the beginning of the XVIII century, Japanese merchants founded their own technical analysis school to use in trade. Most historians agree that one of the founders of this analysis system was the Japanese rice merchant Homma Munehisa (Jap. 本間宗久, 1724-1803).
The efficiency of Homma's work was so high that in one of the periods he concluded 100 successful trades in a row. It is not surprising that subsequently the Japanese candle analysis of the market became one of the most popular methods among traders all over the world.
In short, the essence of the Japanese candle analysis is as follows:
- Finding a candle pattern.
- Determining the location of the pattern in the chart.
The latter point is often decisive. Often even experienced traders make a typical mistake - they almost instantly determine the candlestick pattern by its shape but do not pay attention to the location of the pattern, and this is a fundamental point.
Three white soldiers
Let us consider this pattern based on the book by famous author Gregory Morris, Candlestick Charting Explained: Timeless Techniques for Trading Stocks and Futures.
Let's see what the author of the book says.
Everything seems to be clear and on the point. Except for one big BUT - in all sources known to me, the three white soldiers is considered a reversal pattern.
Let's say that we have critical thinking and do not believe blindly everything we read. We want to verify everything personally. The author himself comes to the rescue!
We see the three white soldiers pattern through the example of the pattern presented by the author. Indeed, after the formation of the pattern, the instrument began to grow confidently and continuously. It is no accident that I singled out the word continuously. This is the first peculiarity - the three white soldiers pattern is a sign of the beginning of a big trend. Specifically in this case, after the formation of the pattern, within three days, the growth continued for more than a month! An interesting observation that each of you can verify - on the basis of only 3 days we can make a forecast for many days or even weeks ahead.
Let us consider a real example. Below is the weekly chart of the NASDAQ-100 index.
We see how, after the patterning of 3 white soldiers, the price continued to grow for several more months.
However, let's turn again to the picture provided by the author and try to understand whether or not we saw the trend reversal after the formation of the pattern. And the answer is absolutely NOT! It is easy to see that the reversal happened much earlier. And this is the second peculiarity - the three white soldiers pattern is a CONTINUATION pattern.
It might seem an insignificant remark, but by no means is it so. It is the location of the candle pattern that determines whether it is a pattern or not. Therefore, do not look for the three white soldiers pattern in the very bottom of the chart. The pattern will appear near the bottom, but after a change in trend. This is what we see in Figure 3-71. I should also note that you should not look for this pattern in the area of high prices.
Peculiarity number 3. Structure and Size of the Candles.
Let us turn again to Gregory Morris’s book.
Here the author is absolutely right in all the statements, but you can add a few points.
1) The model will be considered stronger if the upper shadows of the candles are extremely small or completely absent.
This phenomenon will be evidence of the great strength of buyers.
In Japanese sources, the following representation of this model is more common:
There are practically no upper shadows above the candles.
2) In many sources I note the following alleged fact: "Candles should preferably be of medium size, since heavily stretched bodies can mean overbought market."
In my opinion, the statement is extremely doubtful. Almost any trend begins with a strong momentum. In this case, the large size of the candles, relative to the neighboring ones, will indicate the strength of the buyers. In addition, the term overbought can be applied to various financial markets with great reservations: more to the stock market and less to the super liquid foreign exchange market.
Peculiarity number 4. Working out the Pattern.
Let us turn again to the example from the book.
It is easy to see that before going into continued growth after the formation of the pattern, the price previously made a corrective move. My personal experience shows that in most cases it is worth waiting for exactly this behavior of the asset. The price going into growth immediately is extremely rare, although this also happens.
Everyone should decide for themselves how to act in a similar situation. I prefer to wait for the corrective movement and buy the instrument from rollback. If the price does not roll back and immediately goes into growth, I usually just skip such signals. The market is big, there is no need to hurry - there will always be good trading situations.
Another small observation: if after the formation of the pattern in question there is a correctional movement, it very rarely goes beyond the low of the average candle. This observation allows you to lower the stop loss when opening a trading position. Ideally, I try to put the stop loss behind an extreme, or a strong support / resistance level.
The Three White Soldiers have two related models – Advance Block and Deliberation.
Despite the fact that both these models are related to the three white soldiers pattern, I prefer not to use them. Practice shows that the mathematical probability of these patterns working out is slightly lower than the three white soldiers. A more detailed statistical analysis can also be found in G. Morris's book.
- The Three White Soldiers is a continuation pattern, not a reversal one. This important note will help you correctly determine the location of the pattern, which in turn is a key element in the analysis of the market with the help of Japanese candles.
- The Three White Soldiers is a sign of the beginning of a continuous trend. The pattern shows the strength of buyers, and we know that trends almost always begin with strong impulse movements.
- The pattern will be considered stronger if the upper shadows of the candles are extremely small or completely absent. This phenomenon will be an additional confirmation of the strength of bulls.
- Quite often the formation of the three white soldiers pattern is followed by a small correction usually not reaching the low of the second candle. However, one should be prepared to this turn of events as well - we must remember that there are no guarantees on the market.
- The Three White Soldiers has 2 related models - Advance Block and Deliberation. I should note that these patterns have the properties of three white soldiers, but they require additional confirmation. I prefer not to use these patterns in my trading.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.