The three white soldiers pattern

The three white soldiers pattern includes three bullish candles in a row. If the pattern occurs with a downtrend in front of it, you can consider it a possible signal that the bulls have had enough and are buying in force.

Although it's a nice indication to buy, a small drawback to the three white soldiers is the amount of ground that's already been covered at the completion of the pattern.

Recognizing the three white soldiers

To locate the three white soldiers on a chart, look for three consecutive up days that occur in a prevailing downtrend. Then look closer. If the open, high, low, and close of the second day are higher than those of the first day, and those four points are also higher on the third day than the second, then you're looking at the three white soldiers pattern. Make sense? Have a look at Figure 9-7 for a visual.

The price action behind these days is dramatic, and it normally indicates a quick shift from a downtrend to an uptrend. The three white soldiers mean that the bulls are in control for three straight days beginning with the open of the first day.

Figure 9-7:

The three white soldiers pattern.

Using the three white soldiers to make a profitable trade

The example I use to show you how to make trades based on the three white soldiers pattern is near and dear to my heart. It's a chart of the futures contracts that trade on the level of the Euro, and I executed a successful trade based on this very pattern. Prior to spotting the pattern, I'd been looking for an indication that the downtrend was coming to an end, and so I was delighted to see the three white soldiers shown in Figure 9-8.

Figure 9-8:

successful example of the three white soldiers pattern on a Euro futures chart.

Figure 9-8:

successful example of the three white soldiers pattern on a Euro futures chart.

After such a dramatic move, there's sometimes an opportunity for a pullback (a small trend down from a higher level), but I bought the Euro futures very close to the closing price of the third day of the pattern. I had a plan in place to buy the Euro when it appeared the downtrend was coming to an end, so I was a little more aggressive than I needed to be. With a little patience I could've gotten a better price the next day, but I didn't want to risk missing the trade altogether — something that can sometimes feel worse to me than losing money.

I also highlight on the chart in Figure 9-8 where I chose to exit the position. The trend had been in place for a few weeks, and the long black candle broke the low of the two previous days. I'd been using a sell stop order and continued to move the stop higher as the futures contract price increased. My stop was in place at the low of the day that came two days before the long black candle because I felt this level would indicate the trend was starting to fade. I also kept an eye out for any problematic reversal formations, which you should also do if you find yourself in a similar situation.

Although I exited the trade before the trend reversed again, I was still very happy with this trade. I had a plan, executed it, and profited from it. Why can't all trades be as easy as this one?

The three white soldiers fail to signal bullishness

The three white soldiers is a pretty strong bullish trend reversal pattern, but like all other patterns, it does have the potential for failure. Figure 9-9 shows you what can happen when the three white soldiers doesn't fare so well in battle. It's a chart for the stock that represents ownership in Disney (DIS). I'm assuming that most people have some familiarity with Disney. With a three-year-old in the house, I'm more familiar with the company these days than I want to be.

Figure 9-9:

The three white soldiers pattern fails on a chart of DIS.

Figure 9-9:

The three white soldiers pattern fails on a chart of DIS.

The three white soldiers pattern actually fails twice on the chart in Figure 9-9, and both failures are highlighted. If you see this situation developing and make the decision to trade on it, you'd be smart to place your initial sell stop at the low of the pattern's second day. Most traders cover a lot of ground before they put on a trade, so some retracing of the new uptrend should be expected. Placing a liberal sell stop allows for that.

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