Last Updated on 21 September, 2020 by Samuelsson

Candlestick patterns have become one of the most popular analysis methods available today, and there are quite a variety of patterns available, each holding a different meaning.  In this guide, we will look closer at the three black crows pattern.

Three black crows is a bearish reversal pattern that occurs after a bullish trend. It consists of three consecutive bearish candles, and signals that market sentiment has shifted from bullish to bearish.

In this guide, you will learn everything you need to know about the three black crows candlestick pattern. We will have a closer look at its meaning, definition, and how you can improve the pattern for live trading

Let’s begin!

Three Black Crows Definition

Three Black Crows

Three Black Crows

Three black crows is quite an eye-catching pattern and tends to form with quite a big range. Here are the conditions that must be met for the three black crows to form:

  1. There must be three negative candlesticks
  2. All three should close in the lower fourth of the range.
  3. The upper wicks shouldn’t be very large

The general view is that the three black crows pattern signals and confirms a bearish trend reversal.

What Does a Three Black Crows Pattern Tell Us About the Market?

Since candlestick patterns represent the moves of the market, we may use them to try to understand what happened during the time they formed.

And while it might be hard or impossible to understand why the market moved as it did, it certainly is a good exercise!

In fact, we often look at price to get inspiration for new trading strategies. If you watch it carefully enough, you will soon start to notice things you didn’t see before. And if your observation shows promise, it may become the groundwork for a profitable trading strategy!

Having said all this, let’s try and analyze what the market may have done as it forms a three black crows pattern!

Interpreting the Three Black Crows

As the market comes from a bullish trend, market sentiment is mostly bullish. Buying pressure prevails, and optimism fuels ascending prices.

However, as the market has gone up for some time, an increasing number of market participants become worried that the bullish trend won’t last for much longer.

This results in increasing selling pressure, which begets the first two bars of the pattern.

Upon spotting this, more market players become worried that the uptrend has come to an end, and want to get out of their long positions. As such, a wave of sell orders enters the market, which is when the last candle forms.

Now, since the bulls didn’t manage to keep bears at bay, market sentiment starts to shift. Some traders even choose to go short upon spotting the three black crows that just formed. All in all, this helps to push the market further down, and fuel the coming downtrend!

Three Black Crows Examples

Here follow two examples of the three black crows candlestick pattern.

Three Black Crows Example

Three Black Crows Example

Three Black Crows Example

Three Black Crows Example

How to Trade the Three Black Crows Pattern

Most traders would assume that a strong signal like the three black crows pattern is reliable enough to trade as is.

However, that’s not the case in most markets!

To make the three black crows relevant to your trading, you must add filters and conditions that reduce the number of false trades.

Now, in the following section, we will share with you some of the filters and conditions that we have found work well in the strategies we’ve built. Just remember that you will have to do your own testing to find out what works best for your market and timeframe. You may read more about this in our article on backtesting.

Having said this, let’s have a closer look at the filters!

Volatility Filters

Some of the most versatile filters that tend to work on most markets,are volatility filters.

Volatility is a quite universal concept, in that all markets will have periods when they’re more or less volatile. And depending on the volatility level, a pattern or signal might be more or less reliable.

Now, in the case with the three black crows pattern, there is no right or wrong answer as to whether picking a highly volatile market is better than a calm one. Both approaches could work well, again, depending on the market you’re working with.

However, one thing that we definitely think you should try, is to compare the ranges of the bars comprising the pattern to the previous bars. For this, you may use the average true range indicator, and demand that the range of each bar comprising the three black crows is higher than the average true range.

Quite often, a bar will be more significant the bigger the range.

Having said this, do try the opposite as well. You never know for sure how something works before you’ve tested it yourself.

Market Regime Filters

Market Regime and Sentiment Indicators

Market Regime and Sentiment Indicators

Sometimes you might want to include some broader measures of the general state of the market, the get the whole picture. When using trading indicators or conditions that are confined to the last few bars only, we miss a lot of relevant information.

It could be things like what the overall long term trajectory of the market is, or how the stock market as a whole is behaving.

So how do you bring in this type of information into your analysis? 

Well, here are two common ways:

1. Use a Long Moving Average

One of the most common so-called “regime filter” is the 200-day moving average.

In short, a regime filter works by dividing the market into different regimes, like bullish or bearish.

And with the 200-day moving average, the general view is that a market is bullish when it’s above the average, and bearish when it’s below.

Applied to the three black crows pattern, you might want to only take a trade when the market is below it’s 200-day moving average.

This improves the chances that the long term trend is there to support the bearish move that should follow the pattern.

2. Use Market Breadth Indicator

Market breadth indicators, or sentiment indicators, are valuable tools when it comes to getting a sense of the overall market state.

For example, there are sentiment indicators that look at the number of advancing stocks on an exchange, and compares it to the number of declining stocks.

Looking at the overall state of the market may provide clues that you wouldn’t notice otherwise. For example, if you see that most stocks went up one day, while your market was busy forming the last candle of the three black crows pattern, that may be a good sign. After all, the security is more bearish than the overall market!

Here is our extensive guide to market sentiment indicators!

Three Black Crows Trading Strategies

Now that you know some powerful concepts to use with the three black crows, we wanted to show you how you can begin building your own trading strategies!

Just keep in mind that the strategies that follow are examples only, and not meant for live trading.

With that said, if we were asked to build a trading strategy with the three black crows, we certainly would try the things listed below!

Trading Strategy 1: Three Black Crows With Range Conditions

Earlier in the guide, we touched on using range conditions to improve on the three black crows pattern. However, we only looked at some very general examples, and you certainly could adapt the conditions to the anatomy of the pattern. And that’s what we’ll try to do in this strategy example.

More specifically, we’ll require that each of the three consecutive candles have a bigger range than the previous candle. This ensures that the market accelerates in its new-found direction, perhaps as more people start to realize that they should get out of their positions.

As such, the rules to go short become:

  1. We have a three black crows pattern
  2. Each of the candles comprising the pattern forms with increased range compared to the previous candle

Then we exit after 5 bars.

Three Black Crows Trading Strategy

Three Black Crows Trading Strategy

Trading Strategy 2: Three Black Crows and Overbought Filter

The second strategy example will make us of the mean-reverting traits of equities like stocks. To be very concise, mean reversion means that a market tends to revert once it has moved excessively in one direction.

Now, in the case of trading the three black crows, we want to see that the market has moved excessively to the upside before we take a trade.

And to define this, we could use the RSI.

RSI is one of our favorite indicators, with readings above 70 showing that the market has become overbought. As such, that will be the condition we use in our trading strategy.

We go short if:

  1. We have a three black crows
  2. RSI measured on the bar prior to the pattern is above 70.

Then we exit the trade once RSI closes below 50.

Three Black Crows Trading Strategy

Three Black Crows Trading Strategy

Ending Words

In this guide to the three black crows pattern, you’ve learned how to improve the three black crows, its meaning and definition, as well as a couple of powerful ways to improve the pattern for live trading.

Now, before ending this article, we want to give you one final piece of advice:

Never trade something you haven’t verified yourself!

Unfortunately, most technical analysis doesn’t work as advertised, meaning that you would only incur losses trading it live.

This is why it’s so important that you learn how to validate strategies and patterns on your own. We recommend that you read any of the guides below to learn more about this:

Guide to Backtesting

COMPLETE Guide to Algorithmic Trading

Definitive Guide to Swing Trading

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