Three White Soldiers – Why I Don’t Trade the Candlestick Pattern [Video]

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Three white soldiers have been discussed at length across the web. So, I'm going to take a slightly different approach to this topic.

First I am going to give a brief overview if you are unfamiliar with the setup.

After that, I am going to shift into chart examples from multiple timeframes, so you can see how this setup plays out in the market.

Lastly, I will touch on why I do not trade the pattern. I know...I just committed blasphemy by saying the three white soldiers pattern is not my cup of tea.

Overview

The three white soldiers is a Japanese candlestick pattern that is comprised of bullish candles.

The candles are white because positive periods in eastern technical analysis are white and not green. The reference to soldiers is in the context of the battle between the bulls and bears.

Three White Soldiers

Three White Soldiers

When Does the Pattern Setup?

Now that you have the image of these three white soldiers in your mind, you are going to see the pattern everywhere. It's like when you are thinking about buying a car and you begin to see the car at every stop light and on the highway.

Candles are printing all the time and on every time frame. Therefore the ability to interpret the action is endless.

One person will see a bullish setup, while another will see the end of the world as we know it around the corner. Well, next we will dive into three clear requirements you should look for when the candles present themselves on the chart.

First Requirement - Three Clean Sizeable Candles

The first rule for the pattern is that you need clean candles with decent size. These candles all need to finish in the positive and the candles cannot breach the low of the prior candlestick. For reference, please see the above image.

Next, the candles need to be healthy in size, where the open is essentially the low of the period and the candlestick closes near its high.

Second Requirement - Develop at the End of a Bearish Move

This requirement is a bit more subjective and tougher to identify. You essentially need to identify weakness in a stock and then the three white soldiers show up to the rescue.

This can be after a clear bear trend down or after a stock retreats to the bottom of a trading range.

Third Requirement - Volume

This one is not discussed as often, but you need to see volume in the setup to validate its strength. If you encounter three white soldiers that are on light volume this could mean there was a handful of weak retail traders that jumped in too soon. Without volume a stock has a higher probability of rolling over, thus stopping you out of your position.

Three White Soldiers Chart - Example 1

Weak Three White Soldiers

Weak Three White Soldiers

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In the first chart example, I am reviewing SBAC. One of the first interesting points is that the stock has a move on the open and then immediately rolls over.

Out of this weakness, SBAC then prints three white soldiers. This was an indication that the weakness had subsided and the stock would then attempt to develop some sort of base.

The one issue with the setup is the volume. As we stated earlier, the volume must accompany the setup in order for the signal to carry real weight.

The light volume in the three white soldier pattern for SBAC did not ruin the trade as the stock was able to make a run for the daily highs.

However, the stock topped out at that point and developed a range. So, in this example, while SBAC did not roll over, the stock also did not make the sizeable move we would hope for with this setup.

Three White Soldiers Chart - Example 2

Weak Three White Soldiers

Weak Three White Soldiers

So, if you were expecting to see a beautiful setup where the three white soldiers produced amazing results - sorry. I guess I gravitate to the pain of the market.

At any rate, do you see how MTN sold off the entire day? The stock had a high volume down event followed by three white soldiers. Yet again, the volume did not follow through with the soldiers.

So, what happened next?

The stock had a minor pop back up to the downtrend line only to drag lower into the close.

Are you starting to see a trend with weak volume? That's right, the soldiers may print on the chart, but these are not front line heroes.

Three White Soldiers - Example 3

Let me not completely bore you. Below is a three white soldiers formation that works out nicely.

Clean Three White Soldiers

Clean Three White Soldiers

After a steep selloff into a support zone, DK prints three white soldiers with decent volume and the stock shot back up to the most recent swing high.

This is the one daily chart out of three examples, but the principle remains the same.

Why Three White Soldiers Does Not Work For Me

I know, I know...everything you have read on the internet praises this formation and the power of its trend forecasting capabilities.

I don't doubt it, but for my trading style this setup doesn't work for me and I'm going to share why below.

Buying Selloffs

I don't like buying selloffs or stocks floating lower. I day trade each and every day. For me, I don't like trading beyond the first hour. It is a time suck to sit in front of the screen all day, not to mention there isn't a lot of money in the market after the morning.

If I were to buy three white soldiers after a morning of panic selling, it would mean my stop is below the low of the first candle in the formation. That doesn't' work for me because it's too much risk in the trade relative to my profit potential on the upside.

Next up, the midday buying opportunity as a stock floats into a buying situation. Again, I don't want nor have the patience to sit in front of the screen all day waiting for a setup to develop at 1 pm.

I know what you are thinking, just set an alert and show up when it develops. True, this could work, but then when does it end. I will likely end up looking for alerts throughout the day and overtrading.

Not to mention these midday setups rarely have volume, so how do you trust the validity of the trade.

Just Wait for the Pullback and Stop Whining

Those of you familiar with the setup will say, well duh don't buy the break of the third candle, just wait for a slight pullback on light volume after the three white soldiers develop and buy a 50% retracement from the high of the pattern.

Well, this doesn't work out for me.

Again, it comes back to my time. Once the pullback comes in, how long do I have to wait for the trade to resume its primary trend? Then there is the problem of hope setting in and me holding the position for 45 minutes waiting for the pop that never comes.

Three White Soldiers Video Example

 

In Summary

For my trading style, I like the move to start and move with a sense of urgency.

Now, with all this said, it doesn't mean the three white soldiers won't work for you, but for me, I want to be in the runup of the three white soldiers, not stuck trying to get in on the action after everyone on the street has been witness to the sign of strength.

The thing that gets my blood boiling is if I am a bag holder - I simply won't allow it.

How Can Traidngsim Help?

If you are contemplating trading the three white soldiers pattern you can practice identifying the setup within Tradingsim by replaying tick data for over 11,000 symbols for the last 2 years.

You can then work on developing your own specific rules for entries, stops, and targets.

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Al Hill Administrator
Co-Founder Tradingsim
Al Hill is one of the co-founders of Tradingsim. He has over 18 years of day trading experience in both the U.S. and Nikkei markets. On a daily basis Al applies his deep skills in systems integration and design strategy to develop features to help retail traders become profitable. When Al is not working on Tradingsim, he can be found spending time with family and friends.
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