Last Updated on 21 September, 2020 by Samuelsson

Candlesticks patterns are some of the most popular technical analysis charting methods out there, and have been adopted by many traders who seek an edge in the market. One such pattern is the bullish three white soldiers.

A bullish three white soldiers is a bullish reversal pattern that occurs at the end of a downtrend, and signals a positive trend reversal. The pattern consists of three consecutive tall bullish candles.

In this article, we’ll have a closer look at the three white soldiers candlestick pattern. You will learn its meaning and definition, and we’ll also cover how to improve the patter for real trading.

Let’s start!

Definition of Three White Soldiers

Three White Soldiers

Three White Soldiers

The three white soldiers is a rather eye-catching pattern, as it often forms with big bar ranges. Here are the criteria for the pattern:

  1. There are three bullish candles.
  2. All three close in the upper quarter of the range
  3. Preferably, the have small wicks to the downside

The general interpretation of the three white soldiers is that it signals a reversion of the bearish trend in which it forms.

What Does the Three White Soldiers Tell Us About the Market

All candlesticks are representations of market data, and as such, they tell us a lot about the market and what it has been up to.

Now, it might be very hard to know the exact reasons behind a certain move. Still, analyzing and scrutinizing the market data and patterns we see, is a great exercise that will help you to enhance your understanding of the moves of the market. If you look carefully enough, you will soon start to notice recurrent patterns that get your attention, which have the potential to become a new trading strategy.

In fact, this is how we quite often find inspiration for our own trading strategies. And we think you will draw great benefits from using this method too!

Now that we have covered this, let’s take a look at what the market may have been up to as it forms the three white soldiers pattern!

Coming from a bearish trend, negative market sentiment prevails. As such, most people are hesitant about entering the market, and remain either in cash, or in short positions.

Having been in a downtrend for some time, the market is now becoming oversold. As more and more traders and investors discover this, they want to enter the market, or cover their short positions.

This gives rise to a wave of buy orders, which makes the market perform a big bullish candle.

Being one of the first signs of a bullish reversal, more people join in an attempt to catch the new trend early. This gives rise to not only the second bullish candle, but also the third one.

Once the three big candles have formed, the trend reversal stands out quite a bit, and becomes hard to ignore. As a result, the market sentiment slowly turns positive, and fuels the market onto its new bullish trajectory.

Three White Soldiers Examples

Here follows an example of the three white soldiers pattern:

 

Three White Soldiers Example

Three White Soldiers Example

How to trade the Three White Soldiers Pattern: How to improve the pattern for Live Trading

Being a very strong signal, most new traders would assume that it’s safe to enter a trade once you spot the three white soldiers pattern.

However, reality isn’t as simple! With most types of patterns, there will be quite a lot of false signals, and the three white soldiers pattern is no exception.

To trade the pattern, you will have to add extra filters or conditions that reduce the number of false signals, to ensure that you only take those trades that have the highest odds of success.

Now, the type of filter that works well is completely reliant on the market and timeframe you trade. This means that we, unfortunately, can’t give specific advice on what you should use.

However, below we will outline some of the filters that we have had the most success with.

Then you will have to test for yourself what seems to work best with your market and timeframe, preferably using backtesting!

Volatility Filters

Volatility filters are some of the most versatile and universal filter types you may use in your trading.

All markets have varying levels of volatility, which often has a huge impact on the reliability of patterns like the three white soldiers.  Some strategies will thrive in high volatility settings, while the opposite will be true for other patterns.

In the case of the three white soldiers pattern, there isn’t a right or wrong way of applying volatility. However, here follow some ways that we would try out if we were given the task to turn the three white soldiers pattern into a trading strategy!

1. Use Bar Ranges

When determining whether volatility is high or low using bar ranges, we first need to have a baseline so that we know the normal volatility levels.

Now, one simple yet effective approach is to use the Average True Range (ATR). As its name suggests, ATR is an average of the ranges for the x-last bars. And being an average, it smoothens out the outsize candles, and gives us a good measure to use as our baseline.

Having established the baseline, you just compare the ranges of the candles comprising the three white soldiers to the ATR reading.

If the ranges are higher then the ATR then the market is volatile, and the other way around.

2. Use ADX

ADX is one of our favorite trading indicators, and is used to measure the strength of a trend.

ADX-readings above 25 are generally considered signs of volatile markets, while readings below 20 show that the market is quite calm.

The most used setting for the ADX is 14, but we’ve found it to work well with settings ranging from 5 to 40.

If you’re interested in knowing more, we recommend that you read our guide to the ADX indicator.

Market Regime Filters

Market Sentiment Indicators

Market Sentiment Indicators

While the filters we’ve mentioned so far are confined to the recent price action only, we might want to use broader filters that look more at the general state of the market. That way we can get a better sense of if the bigger trends and forces are there to support the three white soldiers or not.

Let us show you two good examples of what we mean!

1.Moving Averages

The probably most common way to gauge the long term trend of a market, is with moving averages.

More specifically, it’s common to use the 200-day moving average to determine whether a market is bearish or bullish. Typically you say that a market is bullish if it’s above the average, and bearish if it’s below.

If you were to apply this concept to the three white soldiers, you could decide only to take a trade if the market is bullish by the above definition.

That would improve the chances that the long term trend is there to support the bullish move we’re expecting.

2. Market Breadth Indicators

Another less common yet effective way to gauge the overall state of the market, is with sentiment indicators.

For example, there are sentiment indicators that track the ratio between the number of advancing and declining stocks, to give a broader picture of overall market strength.

Using sentiment indicators like the one above may provide clues that we wouldn’t notice otherwise. For example, if you notice that more than half of the stocks went down while your market formed the last bullish candle of the three white soldiers, it may be a good sign. In fact, your market managed to withstand the overall bearish tendency that day, and could be more likely to continue upwards!

If you want to learn more about how to use market sentiment in trading, be sure to check our guide to market sentiment indicators

Three White Soldiers Trading Strategies

Having covered a couple of ways to filter out bad trades, we wanted to show you what a trading strategy using the three white soldiers could look like.

Just keep in mind that the strategies below aren’t ready to trade, but should be seen as inspiration. If somebody gave us the task to construct trading strategies based on the three white soldiers patterns, the above strategies indeed are some that we would give a try!

Let’s get to it!

Trading Strategy 1: Three White Soldiers With Range Conditions

Earlier in the guide, we touched on using bar ranges to improve the three white soldiers.

What we didn’t look at ways to adapt the conditions to the anatomy of the pattern. So that’s what we’ll do in this strategy example!

Now, we’ll require that each of the candles comprising the three white soldiers had a bigger range than the previous candle. That way, we make sure that the market accelerates in the direction of the new trend.

As such, the rules to go long become:

  1. We have a three white soldiers pattern
  2. Each candle in the pattern had an increased range compared to the previous candle.

Then we exit after 5 bars.

Three White Soldiers Trading Strategy

Three White Soldiers Trading Strategy

Trading Strategy 2: Three White Soldiers and Oversold Filter

In mean reverting markets like stocks, a market that has gone too far in one direction tends to revert quite soon.

Now, we could turn this tendency into an advantage, by using an indicator that shows when a market has moved too much in either direction.

In this strategy example, we’ll use the RSI indicator to determine if a three white soldiers pattern is worth taking or not. Traditionally, an RSI reading of less than 30 means that the market is becoming prone to reverting, so that’s the condition we’ll use in this strategy.

So, the rules to go long become:

  1. We have a three white soldiers pattern
  2. The RSI, measured the bar prior to the three whites soldiers, is below 30.

Then we’ll exit after 5 bars.

Three White Soldiers Trading Strategy

Three White Soldiers Trading Strategy

Ending Words

In this guide, we’ve covered the three white soldiers candlestick pattern. You’ve learned it’s definition and meaning, and also some powerful concepts to remove bad trades.

The last thing we want to tell you before ending the guide is the following:

Always test everything yourself before you trade it. 

Most concepts and strategies based on technical analysis don’t work, which also applies to most things that are taught online. As such, it’s paramount that you learn how to validate strategies on your own, not to lose money trading systems that don’t work!

We recommend that you take a closer look at any of the following articles if you want to learn more about profitable trading:

Guide to Backtesting

COMPLETE Guide to Algorithmic Trading

Definitive Guide to Swing Trading

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