Last Updated on 13 July, 2021 by Samuelsson
The candlestick chart is widely used among financial market traders, and one of the reasons is that it shows, more clearly than other charts, the price movement during each trading session, which makes the candlesticks to assume some shapes and patterns. There are many of these patterns, but the One White Soldier trading pattern is one of the few that traders find useful.
Candlestick patterns, such as the One White Soldier pattern, have some predictive value and are used by traders to anticipate how the price is likely to move. Traders normally use these patterns in combination with other trading tools that show the direction of the trend and the key price levels. We will delve into all of those in a moment.
In this post, you will learn the following:
- What the One White Soldier trading pattern is
- The anatomy of the pattern
- Its significance
- The psychology behind it
- How to use it in swing trading
What is the One White Soldier trading pattern?
The One White Soldier trading pattern is a reversal candlestick pattern that is formed over two trading sessions, so it consists of two candlesticks. It is a bullish reversal candlestick pattern that occurs at the end of a prolonged downward price movement — which could be a downtrend, an extended pullback in an uptrend, or a downward price swing in a range-bound market. Whichever nature of the downward price move it occurs in, the pattern indicates a potential reversal to the upside.
A unique two-candlestick pattern, the One White Soldier trading pattern tells a peculiar story about the price movement. It starts with a bearish candlestick in the first trading session that seems like a normal continuation of the ongoing downward price movement, and then, the next trading session opens above the closing level of the previous candle and surges upward to close near the high level of the trading session, and the closing price is also above the open price of the preceding session.
As you know, a trading session can be a day, a week, a month, or even an intraday timeframe, such as four-hourly, hourly, 30-minute, or so. The price movement in each trading session is represented graphically with a candlestick. In the case of the One White Soldier pattern, there are two consecutive candlesticks with opposite colors but with characteristic long bodies.
Since this candlestick pattern can indicate the end of a pullback and the emergence of a new impulse swing in a trend, swing traders can use it create some swing trading strategies — either the price action pattern alone or in combination with other trading tools that can improve the odds of the trade setup. We will be discussing all those in detail in a short while, but first, let’s take a closer look at the structure of the pattern.
The anatomy of the One White Soldier trading pattern
One of the main features in identifying a candlestick pattern is where it forms in relation to the overall price structure and key price levels. Being a bullish reversal price action setup, the One White Soldier pattern usually forms in a downtrend, a pullback (downward retracement) in an uptrend, or the downswing in a range-bound market. The One White Soldier reversal pattern consists of two candlesticks, with each representing the price movement in a trading session, which can be a full trading day or some other timeframe.
Looking at the daily trading sessions, for example, these are the main features you can use to recognize the One White Soldier trading pattern:
- The first trading day ends as a long and bearish candlestick, in line with the downward price movement preceding it
- The second trading day ends as a long and bullish candlestick
- The second trading day’s candlestick opens within the body of the first day’s candlestick and closes above its open price.
Hence, the candlestick pattern consists of a bearish (black, red, or whatever color used to represent bearishness) candlestick followed by a bullish (white, green, or whatever color you use to represent bullishness) candlestick. Other criteria for this pattern include:
- The market is characterized by a prevailing downward movement — a downtrend, a prolonged downward retracement in an uptrend, or a downswing in a range-bound market.
- The second candlestick must close near its high.
- The second day has to open above the close of the preceding day and climb to close above the opening price of the first day.
- The length of the candlesticks should not be short — both the first and second candlesticks should be “long.”
Please note that for a candlestick to be considered long, its body height should be greater than the average body height of the last 20 candlesticks before it. As a bullish reversal pattern, the One White Soldier trading pattern is more likely to be seen around a support level.
The significance of the One White Soldier trading pattern
The One White Soldier trading pattern indicates a potential bullish price reversal. It is one of the reliable bullish reversal candlestick patterns used by price action swing traders. While it may not be very effective in predicting a full trend reversal, when it occurs in a pullback of an uptrend, it may indicate the end of that pullback and the emergence of a new impulse wave in the trend direction, which can present a tradable opportunity to swing traders. The pattern is more significant if it occurs around a well-known support level.
In a range-bound market, the candlestick pattern may be seen at the end of the downward price swings, around the lower boundary of the range, which is obviously a support zone. Here, the pattern signals a possible end of the downswings and the beginning of the next upward price swing.
In both situations, the pattern shows that the downward price movement preceding it may have lost momentum, giving way for a new price swing in the opposite direction. This is why swing traders use the setup in those situations to capture the new upward price swing.
However, in a full downtrend, the pattern is of little or no significance, and here’s why: The pattern can only occur, against the trend, in the powerful downward impulse waves, so it is more likely to fail unless it occurs at a strong support level. But even when it occurs around a strong support level, the chances of a complete trend reversal is still low, which is why it is not advisable to try to trade trend reversal with just the One White Soldier pattern or any other candlestick pattern. In fact, attempting to time a market reversal is dangerous, unless you are using a buy and hold strategy without leverage and only buying ETFs that track major equity indices, such as the S&P 500 Index and Dow 30 Index, which have less chance of going down to zero.
The psychology behind the One White Soldier trading pattern
Now that we know the significance of the One White Soldier trading pattern based on where it occurs in the market structure, let’s take a look at the psychology behind the pattern as regards the sentiment of market participants and their trading activities.
As you have learned so far, the One White Soldier pattern forms in a downward price swing, as follows: A downward price move ends with a characteristically long bearish candlestick, which is the first candlestick in the One White Soldier trading pattern. This bearish candlestick could be seen as a form of capitulation or selling climax, which implies that almost everyone with bearish sentiment has sold, so there may not be many bears again to keep pushing the price lower. With bears throwing their last punch, the bulls then seized the opportunity to take control of the market, which can be seen in the next candlestick that opened higher than the close price of the bearish candlestick and closed bullishly, above the open price of the bearish candlestick.
The pattern usually occurs around a support level where there is a huge demand level in the form of many buy limit orders already lying in wait. When the price gets to that level, the bears throw everything they have to take out all the buy orders and convincingly break below the level but can’t. The inability of the bears to fully break through the level emboldens the bulls on the sideline to flood the market with huge buy market orders. The exhausted bears can’t help but let the bulls have their way, leading to a bullish price reversal.
Another factor that contributes to the formation of this pattern is the “dead cat bounce” effect after the prolonged price decline. Early sellers are trying to cover their shorts in fear of a swift price reversal.
How to use the One White Soldier trading in swing trading
If you have been reading our previous posts, you would realize that there are often three factors you need to spot a high-probability trade setup. A high-probability setup is defined as a trade setup with high odds of a successful outcome. The three factors that must be present include:
- A favorable price structure — the right trend or a range-bound market
- An important price level
- A trade trigger
Here, you can see that the One White Soldier trading pattern can serve as a trade trigger but to have a good trade setup, it must occur at the right level in the right market situation. Being a bullish reversal pattern, the best place to have it is at a support level in an up-trending market or the lower boundary of a range-bound market. Hence, to effectively trade the One White Soldier pattern, you need some tools that can help you identify an uptrend and the important support levels, as well as a range market and its boundaries.
The trading tools you can use
Some of the important tools you can use alongside the Three Outside Down trading pattern include:
- Trend lines
- Support and resistance levels
- Long-period moving averages
One of the best setups you can get with the One White Soldier pattern is in an uptrend when occurs at the end of a pullback. We know that trend lines help us to delineate the direction of a trend so that we look for trade setups in the right direction and not trade against the trend. In addition to helping us delineate the trend direction, trend lines can also act as dynamic support or resistance levels, where the price is likely to reverse.
Since we are only interested in uptrends, attach your trend line to the lows of the pullbacks so that it can act as a rising potential support level for future pullbacks. When the price makes a pullback in the future, it is likely to reverse around the trend line. Hence, a One White Soldier pattern that occurs there is more likely to lead to a bullish reversal to continue the uptrend with the emergence of a new impulse wave.
Long-period moving averages
A long-period moving average, such as the 200-day, 100-day, or 50-day moving average, is another tool that can help you identify the direction of the trend. But in addition to spotting the trend, a long-period moving average can also serve as a dynamic support and resistance level depending on the type of trend.
In an up-trending market, the moving average has an upward slope and mostly stays below the price bars, and pullbacks, here, are downward moves, which can reverse around the moving average. In other words, the moving average can serve as support levels in an uptrend. If the price makes a pullback to the moving average level and forms a One White Soldier pattern, it will likely reverse to continue the uptrend.
Horizontal support levels
Aside from the rising and dynamic support levels, horizontal support/resistance levels, which are price levels where the price has reversed in the past, are very important in trading price action setups because the price is likely to reverse around such levels again.
Normally, you want to watch out for support levels, but in an up-trending market, resistance levels become support levels once the price rises above them, so what you should look out for are important price levels that lie below the current price action. The price can reverse when it falls to such levels. In a range-bound market, the lower boundary is the support zone where an upward reversal is expected. A One White Soldier pattern that forms at such a level has a high chance of leading to an upward price swing.
Fibonacci retracement tool
The Fibonacci retracement tool is a great tool for trading a trending market where it is used to estimate potential levels where the price is likely to retrace before reversing. Key retracement levels include the 23.6%, 38.2%, 50%, 61.8%, and 76.4% levels, you should focus on the 50% level and above. Check for the One White Soldier pattern when the price retraces to the 50%, 61.8%, or 76.4% levels. When you see the pattern, it is an indication that the retracement might have ended and the price starting a new swing in the trend direction. See the chart below where the pattern occurred around the 61.8% level.
Trading the One White Soldier pattern
From our discussion so far, it is clear that the right situation to trade the One White Soldier pattern is in an up-trending market or a range-bound market.
In an uptrend
An uptrend is a market that is predominantly rising. Of course, the price doesn’t move in a straight line; it moves in waves/swings — upswings and downswings. In an uptrend, the upswings are bigger and are called impulse waves, while the downswings are smaller and are called pullbacks. The pullbacks end around support levels, which may be represented by horizontal levels, a moving average, a trend line, or a Fibonacci retracement level.
As a swing trader, your aim is to trade the impulse waves, so you should wait for a pullback to get to the support level and look for the One White Soldier pattern, which serves as your trade trigger. When you see the pattern, place a trade at the close of the second day’s candlestick, which completes the pattern. Set your stop loss below the swing low and your profit target just before the nearest resistance level.
In a range-bound market
A range-bound market is one that moves up and down within two boundaries — upper and lower boundaries. With the One White Soldier pattern, which is a bullish reversal pattern, you should aim to trade the upward swings from the lower boundary. So, you look for the One White Soldier pattern when the price falls to the lower boundary so that you can enter a trade at the beginning of the new upswing.
The One White Soldier pattern is a bullish reversal candlestick pattern, which can be used, in combination with other tools, to develop a swing trading strategy. While you can learn swing trading on your own by studying trading resources you can find online, it is better and much faster if you can enroll in a swing trading course.
In case you only want to make money from trading stocks without bothering to learn how to analyze the markets to find tradable opportunities, you can subscribe to a reliable swing trading signal service that would tell you which stocks to buy, when to buy them, and when to exit your trades.