Bearish Three Line Strike Candlestick Pattern

The bearish three line strike is a Japanese candlestick pattern that makes $41.80 in the crypto market and loses $42.50 and $13.40 in the forex and stock markets on average per $100 risked.

But what if I told you that there’s a way to trade this pattern profitably in all markets? 

Would that pique your interest?

Keep reading if you want to learn how to profit with the bearish three-line strike candlestick pattern in a data-driven way.

What Is a Bearish Three Line Strike Candlestick Pattern?

The bearish three-line strike candle pattern is a four candle bearish continuation pattern. The basic premise is that the overriding trend, which in this case is bearish, will win out.

Does this hold? Is the traditional way of trading this pattern profitable?

Let’s learn how to identify this pattern.

How to Identify Bearish Three Line Strike Candlestick Patterns

Bearish Three Line Strike Pattern Identification (SBUX)

The following are the requirements for a valid bullish three line strike pattern: 

  • The first three consecutive bearish candles should close lower than the previous candle.
  • The first three candles should be similar in length, resembling a staircase.  
  • The fourth bullish bar should engulf the real bodies of all three previous bearish candles e.g.:
    • The opening price of the fourth candle should be lower than the third candle’s closing price.
    • The closing price of the fourth bullish candlestick should be higher than the first candle’s opening price. 
  • The pattern must occur during a downtrend. 

The Starbucks (SBUX) daily chart on July 24th, 2002 shows the bearish three line strike in action. We see that price is in a downtrend with the price action falling under the fifty-day moving average. 

We also see a downward staircase-like pattern for the three bearish candlesticks right before the reversal bar that fully engulfs the prior three candles.

With the engulfing candle, we see that the fourth bar opened lower than the third bar’s close and higher than the first bar’s open, which completes the pattern. 

Now that we know how to identify the pattern, let’s learn how to trade this pattern profitably.

How to Trade the Bearish Three Line Strike Candlestick Pattern

The bearish three line strike candlestick pattern should be traded using a bullish mean reversion strategy using a risk-reward ratio of 1, anticipating a quick bounce.

But before we learn that setup, let’s get a better understanding of how this pattern is traditionally traded.

Bearish Three Line Strike Continuation Trade Setup

Bearish Three Line Strike Continuation Trade Setup (AMD)

The pattern occurred during an downtrend in the above Advanced Micro Devices daily price chart on September 19th, 2000. 

The first three consecutive bearish candles opened and closed lower than the previous candles. And the fourth bullish candle opened lower than the third candle’s close and closed higher than the first candle’s open and completed the pattern.

Most traders trade bearish three-line strike candlestick patterns by entering the market with a short position once the price breaks below the fourth candle’s low. The position is secured with a stop loss above the fourth candle’s high looking for a trend continuation

And if you’re like most traders, you’ve probably been losing money with this setup.

A much better method for trading this pattern as a continuation trade, is to enter at the break of the fourth candle’s close. A trader would have netted profits in both the stock and crypto markets.

But, as promised, there’s an even better way to trade this pattern according to history.

Bearish Three Line Strike Bullish Mean Reversion Trade Strategy

Intel Corporation’s (INTC) daily price chart on August 29th, 2005 demonstrates the mean reversion strategy perfectly. In fact, you can trade this pattern using both a bullish and bearish mean reversion strategy.

For now, let’s cover the bullish side.

We see the three bearish bodies in a downward, staircase-like pattern. The fourth candle reverses all of the bear momentum and opens lower and closes higher than the three prior candles.

With the pattern identified, how do we enter?

A bullish mean reversion strategy waits for the price to break the pattern low, which typically is the low of the fourth candle, and enters long once prices passes back above the low with a stop loss set at one average true range or ATR.

In the Intel example, the low occurs on the 26th at $25.31. Price crosses below our pattern low on the 1st of September and above our low the very next day moving higher over the next few days for a profitable trade.

We can also see that a bearish mean reversion trade would have worked equally well. We would have gone short on September 8th, 2005 depending upon how long you wait for confirmation.

Regardless, it’s safe to say that the bearish three line strike means volatility is incoming.

Does the Bearish Three Line Strike Candlestick Pattern Work? (Backtest Results)

I backtested the bullish three-line strike candlestick pattern on the daily timeframe in the crypto, forex, and stock markets using the following rules.

  • A close above the 50-day SMA constitutes an uptrend.
  • I tested risk-reward ranges from 1 to 5. 
  • The optimal risk-reward ratio is selected using profit per bar.
  • Entry and exits are discussed in the how-to trade section above.
  • Confirmation must occur within three days of the pattern signal.

Bearish Three Line Strike Continuation Backtest Results

cryptoforexstock
pattern_namebearish three line strikebearish three line strikebearish three line strike
pattern_categorybearish continuationbearish continuationbearish continuation
pattern_bars444
required_trenddowntrenddowntrenddowntrend
traded_asbearish continuationbearish continuationbearish continuation
stop_bar_typehighhighhigh
entry_bar_typelowlowlow
risk_reward252
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516951
pattern_tickers26287702
patterns768521704
trades19201424
confirm_perc0.250.240.25
wins919122
losses10182302
win_perc0.4740.0950.288
avg_win_bars7.3342.8426.93
avg_loss_bars3.19.099.31
cons_wins322
cons_losses143
edge0.418-0.425-0.134
cryptoforexstock
pattern_namebearish three line strikebearish three line strikebearish three line strike
pattern_categorybearish continuationbearish continuationbearish continuation
pattern_bars444
required_trenddowntrenddowntrenddowntrend
traded_asbearish continuationbearish continuationbearish continuation
stop_bar_typehighhighhigh
entry_bar_typeclosecloseclose
risk_reward455
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516951
pattern_tickers26287702
patterns768551708
trades758471575
confirm_perc0.990.990.92
wins18117355
losses577301220
win_perc0.240.1380.225
avg_win_bars5.283.73.78
avg_loss_bars0.671.321.82
cons_wins643
cons_losses486
edge0.2-0.170.345

Bearish Three Line Strike Reversal Backtest Results

cryptoforexstock
pattern_namebearish three line strikebearish three line strikebearish three line strike
pattern_categorybearish continuationbearish continuationbearish continuation
pattern_bars444
required_trenddowntrenddowntrenddowntrend
traded_asbullish reversalbullish reversalbullish reversal
stop_bar_typelowlowlow
entry_bar_typehighhighhigh
risk_reward451
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516951
pattern_tickers26287702
patterns728471706
trades516701310
confirm_perc0.710.790.77
wins1591731
losses36579579
win_perc0.2940.1360.558
avg_win_bars38.07104.026.02
avg_loss_bars13.2525.827.12
cons_wins224
cons_losses483
edge0.466-0.180.118
cryptoforexstock
pattern_namebearish three line strikebearish three line strikebearish three line strike
pattern_categorybearish continuationbearish continuationbearish continuation
pattern_bars444
required_trenddowntrenddowntrenddowntrend
traded_asbullish reversalbullish reversalbullish reversal
stop_bar_typelowlowlow
entry_bar_typeclosecloseclose
risk_reward551
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516951
pattern_tickers26287702
patterns718441706
trades708211527
confirm_perc0.990.970.9
wins15117858
losses55704669
win_perc0.2140.1430.562
avg_win_bars41.4771.384.73
avg_loss_bars10.6722.626.55
cons_wins224
cons_losses584
edge0.28-0.1450.122

Bearish Three Line Strike Mean Reversion Backtest Results

cryptoforexstock
pattern_namebearish three line strikebearish three line strikebearish three line strike
pattern_categorybearish continuationbearish continuationbearish continuation
pattern_bars444
required_trenddowntrenddowntrenddowntrend
traded_asbearish mean reversionbearish mean reversionbearish mean reversion
stop_bar_typeatratratr
entry_bar_typepattern_highpattern_highpattern_high
risk_reward111
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516951
pattern_tickers26287702
patterns778551709
trades425481028
confirm_perc0.550.640.6
wins31373619
losses11175409
win_perc0.7380.6810.602
avg_win_bars3.132.952.61
avg_loss_bars3.095.333.1
cons_wins254
cons_losses233
edge0.4780.3610.202
cryptoforexstock
pattern_namebearish three line strikebearish three line strikebearish three line strike
pattern_categorybearish continuationbearish continuationbearish continuation
pattern_bars444
required_trenddowntrenddowntrenddowntrend
traded_asbullish mean reversionbullish mean reversionbullish mean reversion
stop_bar_typeatratratr
entry_bar_typepattern_lowpattern_lowpattern_low
risk_reward111
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516951
pattern_tickers26287702
patterns768561708
trades14150290
confirm_perc0.180.180.17
wins10102188
losses448102
win_perc0.7140.680.648
avg_win_bars2.40.461.86
avg_loss_bars2.02.293.5
cons_wins333
cons_losses122
edge0.4240.360.298

We can see that the pattern does work as a bearish continuation in the stock market using the close as an entry and that the direction of the longer-term trend ultimately wins out as identified by the optimal risk-reward ratio of four.

But most of the time, you’ll likely want to trade using a mean reversion strategy.

The Bottom Line

The bearish three-line strike pattern does signal a possible bearish trend continuation, but as with many patterns, there’s a period of volatility that occurs before the resumption or change in trend, which can be profitable to trade.

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