THE THREE LINE STRIKE CANDLESTICKS.
If I told my Grand dad back during the second world war that some day you’ll be able to make money just by sitting at home at the comfort of your chair, He’d probably have a laugh!
This is what we call progress, the world has advanced drastically in the 21st Century. Our ancestors walked by foot we fly, they had to go to war we now have fighter drones which we control while we are safe and comfortable back at base. It’s lit right?👌
The same can be said in the world of business and finance. We can now earn money by just chilling at home. We now sell and buy stocks, forex and crypto on our smart phones.
THE NEGATIVE STIGMA ATTACHED TO ONLINE TRADING.
It is a common belief in many parts of the world that trading is a waste of money or a modern day scam but I can bet my house that isn’t the case. As it is with every business there are risks associated and the key to success is to minimize the risks. The trading gurus do this by understanding the market patterns. They can accurately predict what trend the market may take at a particular time. They know exactly what’s the right time to sell or buy to make the profit.
One great way in predicting the trend is the use of the THREE LINE STRIKE CANDLESTICK. You’ve probably come across the following.
What are three line candles?
A three line strike is a pattern on a price chart that shows a potential shift from a downtrend to an uptrend. It happens when there are three downward (red or black) candles followed by a single upward (green or white) candle that’s longer than the previous three candles combined. This change suggests a possible rise in prices after a period of decline. Traders see this pattern as a sign that the downward trend may be ending, and a new upward trend could be starting. They may consider buying opportunities based on this pattern. And this is the trick to making the dow!
These charts show price on the right (vertical) axis, and time on the bottom (horizontal) axis. Moreover, the chart is made of bars that have little lines stemming from the top and the bottom; these are known as candles. The candle conveys four pieces of information:
1. The open price 3. The high price
2. The close price 4. The low price
Below is an image that illustrates how those four pieces of Information the open, low, high, and close for a given period of time are visualized in the context of a candle:
Wicks or Shadows: The wicks, also known as shadows, are the thin lines that extend above and below the rectangular body of a candlestick. They represent the highest and lowest prices reached during the time period covered by the candlestick.
Rectangular Body: The rectangular body of the candlestick represents the price range between the opening and closing prices during the time period. If the candlestick is filled or colored, it typically indicates whether the opening price was higher or lower than the closing price.
Color of the Candlestick:
Red or Bearish: If the candlestick is red or filled, it means that the opening price was higher than the closing price. This suggests bearish sentiment, meaning sellers were in control during that time period.
Green or Bullish: Conversely, if the candlestick is green or hollow, it means that the opening price was lower than the closing price. This indicates bullish sentiment, meaning buyers were in control during that time period.
IMPORTANT THREE LINE CANDLE PATTERNS AND THEIR CHARACTERISTICS.
There are two different three line strike candlestick patterns: bullish and bearish. These patterns are considered to be continuation patterns. While the bullish 3-line is a bullish continuation pattern, conversely, the bearish 3-line candlestick pattern is a bearish continuation pattern.
In trading and financial markets, "bullish" and "bearish" are terms used to describe the sentiment or direction of the market or a particular asset:
Bullish: a bullish sentiment indicates optimism and an expectation that prices will rise. In a bullish market, investors believe that the value of assets or securities will increase over time. Bullish traders often look for buying opportunities, anticipating upward price movements. Bullish indicators include rising prices, increasing volume, positive news, or strong fundamental data suggesting growth.
Bearish: a bearish sentiment indicates pessimism and an expectation that prices will fall. In a bearish market, investors anticipate declining prices for assets or securities. So In this market traders may seek to sell assets short or hold cash, anticipating downward price movements. .
I. Bullish Three Line Strike Pattern.
The bullish three-line strike pattern is a significant signal in trading that indicates a shift from a rising market to a potential downward trend. Initially, for three consecutive days, the closing price of the asset is higher than the previous day, suggesting a steady upward movement in the market. During these three days, each day’s lowest price is higher than the previous day’s low, indicating growing confidence among buyers. Simultaneously, for four consecutive days, the asset’s highest price continues to climb higher than the previous day’s high, highlighting robust upward momentum. However, on the fourth day, there’s a sudden change. The price drops below the lows of the previous days, surprising traders and disrupting the positive sentiment. This abrupt downward movement on the fourth day is often accompanied by significant selling pressure, potentially signaling the beginning of a new downward trend in the market. In essence, the bullish three-line strike pattern reflects a shift in market sentiment from optimism to caution, prompting traders to reassess their strategies and adapt to the changing market conditions.
So, when experts see a bullish signal like the three-line strike pattern, they usually think about buying because they believe the price will increase. It’s like buying something cheap now and selling it later when it’s more expensive to make a profit.
II. Bearish Three Line Strike Pattern.
In contrast to the bullish three-line strike pattern, which suggests a potential upward trend reversal, the bearish three-line strike pattern indicates a reversal from a bullish market sentiment to a possible downward trend. While the bullish pattern consists of three consecutive periods where the close, low, and high are higher than the prior days, followed by a significant downward move on the fourth day, the bearish pattern unfolds differently. In the bearish variant, there are three consecutive periods where the close is lower than the previous day, accompanied by declining lows and highs. These three days depict a consistent downward movement in the market, reflecting increasing bearish sentiment among traders. However, on the fourth day, there’s a sudden change in momentum.
How to trade using the three line patterns.
a) Identify the Setup: Look for the first three bearish (red or black) candlesticks in a row on the chart.
b) Engulfing Candle: Wait for the fourth candlestick, which should be a large bullish (green or white) candle that completely engulfs the three previous bearish ones. This candlestick indicates a potential reversal in the trend.
c) Confirmation: Watch for the fifth candlestick to break above the high of the fourth bullish candlestick. This confirms the bullish reversal signal.
d) Enter Long Position: Once the price breaks above the high of the fourth candlestick, consider taking a long (buy) position.
e) Set Stop Loss: Place a stop loss order below the low of the fourth candlestick to limit potential losses if the trade goes against you.
f) Optional Short Position: Some traders may also consider taking a short (sell) position if the price falls below the low of the fourth candlestick.
g) Set Stop Loss for Short Position: If entering a short position, place a stop loss order above the high of the fourth candlestick to manage risk.
Chart Example.
This chart example shows a three line strike pattern on a daily chart. You’ll notice five bearish candlesticks in a row, followed by a large bullish candlestick that engulfed three of the candlesticks. Traders take an entry long when the price breaks above the third bearish candlestick. If the price fails the breakout, you would put your stop loss below the the third bearish candlestick.
Take note of the gap-up pattern that formed after the large bullish candlestick. This created a large uptrend afterward. Three line likes don’t always create a large uptrend, but it can happen.
Accuracy of the three line strike pattern.
The three-line strike pattern boasts an accuracy rate of around 64 percent. This means that historically, this pattern has been correct in signaling a reversal or continuation of the trend about 64 percent of the time. However, it’s essential to remember that past performance doesn’t guarantee future results. However the three-line strike pattern is considered rare in the world of trading. Due to its infrequency, traders often use scanning tools or software to identify these patterns efficiently. Using scanning tools can help traders sift through numerous charts and quickly pinpoint instances of the three-line strike pattern, saving time and effort.
Risk Management.
While the three-line strike pattern shows a positive average accuracy, it’s crucial to employ effective risk management strategies when trading this pattern. Risk management involves techniques like setting stop-loss orders, diversifying your trades, and sizing your positions appropriately to protect your capital from significant losses.
Advantages of using the Bullish Three Line Strike pattern:
a) Confirms Uptrend: This pattern happens during an uptrend, indicating that buyers are dominating the market and confirming the upward momentum.
b) Shows Strong Buying: It’s made up of three long white candlesticks, each with a higher closing price than the previous one, signaling increasing buying pressure in the market.
c) Potential Profit: Being a bullish signal, traders can use it to enter a long (buy) position, expecting the market to keep rising, potentially leading to profitable trades.
d) Reliable Pattern: While it’s rare, it’s considered a reliable continuation pattern, meaning it often leads to the trend continuing in the same direction.
e) Buying Opportunity: It allows traders to buy at a low point in the current trend, potentially maximizing profits when the trend continues upward.
Disadvantages of the Bullish Three Line Strike pattern:
a) Rare Occurrence: This pattern doesn’t show up often on charts, making it hard to rely on as the only factor for trading decisions.
b) False Signals: Sometimes, the pattern can give false signals, meaning it might not accurately predict future market movements. This can happen if other indicators don’t confirm the pattern or if the market doesn’t continue moving in the expected direction after the pattern forms.
c) Not for All Markets: It may not work well in markets with low trading activity or where trends are hard to identify.
d) Poor Reward/Risk Ratio: The distance between where traders enter the market and where they place a stop loss (to limit potential losses) can be too large, resulting in a less favorable reward compared to the risk taken.So, while the Bullish Three Line Strike can be useful, traders should be aware of these drawbacks and use other tools and strategies for more accurate trading decisions.
Back testing.
Backtesting the Bullish Three Line Strike pattern is a crucial process for traders looking to assess its effectiveness as a trading tool. This involves;
a) Data Gathering: Collect historical data for the asset you want to analyze, including open, high, low, and close prices, as well as trading volume. This data is essential for creating a comprehensive picture of past price movements.
b) Chart Creation: Use the historical data to construct a candlestick chart for the asset. This chart will serve as the basis for identifying instances of the Bullish Three Line Strike pattern.
c) Pattern Identification: Scan the candlestick chart to identify occurrences of the Bullish Three Line Strike pattern. Look for three consecutive downward candlesticks followed by a single upward candlestick that engulfs the previous three.
d) Simulation: Simulate trades based on the occurrences of the Bullish Three Line Strike pattern in the historical data. Keep track of the results of each trade, including profits or losses incurred.
e) Performance Comparison: Compare the performance of the asset after the occurrence of the pattern to its performance before the pattern. This comparison will help assess the pattern's reliability in predicting future price movements.
Conclusion and Summary:
In conclusion, the Three Line Strike candlestick pattern serves as a valuable tool for traders seeking to anticipate market trends and make informed trading decisions. This pattern, whether bullish or bearish, provides insights into potential shifts in market sentiment and offers opportunities for traders to capitalize on emerging trends. The bullish Three Line Strike pattern indicates a possible reversal from a downtrend to an uptrend, while the bearish pattern suggests a reversal from an uptrend to a downtrend. Both patterns consist of consecutive candlesticks that reflect changing market dynamics, providing traders with visual cues to assess market conditions. When trading using the Three Line Strike patterns, it’s essential to follow a systematic approach, including identifying the setup, waiting for confirmation, and implementing risk management strategies. While the patterns boast a decent accuracy rate, traders should exercise caution and combine them with other technical and fundamental analysis tools for more reliable trading decisions.
HAPPY TRADING, AND MAY THE MARKETS BE EVER IN YOUR FAVOR!