Bullish Three-Line Strike Explained & Backtested (2024)

The bullish three-line strike is a four-bar bullish continuation Japanese candlestick pattern that historically leads to volatility according to extensive backtesting.

You will lose money trading this pattern if you follow traditional technical analysis advice.

But what if I told you that you don’t need to strike out with this pattern?

Would you be interested?

Keep reading to learn how to trade the bullish three-line strike candlestick pattern in a data-driven way.

What Is a Bullish Three-Line Strike Candlestick Pattern?

The bullish three-line strike is a four-bar continuation pattern with mixed results when traded as intended.

The three-line strike name comes from the three white candles before the sizeable black reversal candle.

Let’s look at how to identify the three-line strike patterns and then move on to trading them optimally.

How to Identify Bullish Three-Line Strike Candlestick Pattern

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

• Three consecutive medium-to-large bullish candlesticks with higher closes, each opening within or near the previous candle’s real body with little to no upper shadow.
• The fourth bearish candlestick must open above the prior candle’s close and close below the first candle’s open.
• The three-line strike must occur during an uptrend.

Astute candlestick chartists will realize that the first three candles constitute a three white soldiers candlestick pattern.

The Brookfield Asset Management (BAM) daily chart on August 7th, 2018, shows the pattern in action. We see price is in an uptrend as it’s above the 50-day simple moving average, which we’re using as a proxy for a bullish trend.

We see three bullish candles opening within or near the previous candle’s real body with almost no upper wicks. The fourth bar opens higher than the last candle’s close, and the price falls considerably and closes below the first candle’s opening.

With the four candles arranged precisely the right way during an uptrend, we now know how to identify this pattern on our candlestick charts.

Now let’s learn the best bullish three-line strike trading strategy according to history.

How to Trade the Bullish Three-Line Strike Candlestick Pattern

Traders should expect future volatility trade the bullish three-line strike candlestick pattern using a bullish mean reversion trading strategy in the stock market and a bearish mean reversion strategy in the forex market.

Crypto traders should pass on this pattern as there are not enough data to state the best trading strategy with statistical significance.

Before we learn how to capitalize on this volatility, let’s understand the traditional trading strategy.

Bullish Three-Line Strike Bullish Continuation Trade Setup

Let’s practice identifying this four-bar pattern using the above Brookfield daily chart.

Price is in an uptrend as it’s above the 50-day simple moving average. We see three bullish bars with short upper wicks, each opening within or near the last candle’s real body, followed by a large red candle engulfing the previous three white soldiers.

Traders traditionally trade the bullish three-line strike candlestick patterns by entering the market with a long position once the price breaks above the fourth candle’s high with a stop loss below that same candle’s low.

Now that we understand how traditional candlestick chartist approach this pattern, let’s learn how to trade it optimally according to data.

Bullish Three-Line Strike Bullish Mean Reversion Trade Setup

The bullish mean reversion strategy enters long on reclaiming the pattern low, setting a stop loss of one ATR below that low.

Let’s use the above Caterpillar November 13th, 2014 daily chart to clarify.

The pattern low occurs on the fourth bar at $100.68. The price drops below this low and then back above it the next day triggering an entry at $100.68. We see that any stock trader who took this trade profited handsomely.

Forex traders should anticipate mean reversion but in the opposite direction.

Bullish Three-Line Strike Bearish Mean Reversion Trade Setup

A savvy forex trader will wait for the price to cross above the pattern high and then enter short when the price drops below that high, setting a stop loss of one ATR.

We’ll use the above Twilio March 23rd, 2018 daily chart to make this lucid.

The pattern high occurs on the third bar at $42.41. The price moved above the pattern high and back below it on the 27th, triggering a short entry that turned into a nice profit.

Speaking of profits, what can a 21-year backtest tell us about the profitability of the best bullish three-line strike trading strategies?

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

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

• 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.

Similar Candlestick Patterns

Multiple candlestick patterns are often confused with the bullish three-line strike. It’s critical to understand the differences when using candlestick pattern technical analysis.

Bearish Three-Line Strike vs. Bullish Three-Line Strike

The bearish three-line strike candlestick pattern is the opposite of its bullish brother. Both patterns require a trend and are considered continuation patterns by traditional technical analysts.

The bearish three-line strike has three consecutive black candles opening within the previous and closing lower. In contrast, the bullish has three white candles opening within the last and closing higher. The final candle with the bearish pattern is bearish instead of bullish.

In other words, the candle color and trend are the only differences between the bearish and bullish three-line strike patterns.

Three White Soldiers vs. Bullish Three-Line Strike

As previously mentioned, the bullish three-line strike contains a three white soldiers pattern. The three white soldiers consists of three consecutive bullish medium-to-large real-bodied candles with slight or no upper wicks occurring in an uptrend.

The Bottom Line

As always, traders should be wary of traditional trading methods. After all, most traders lose money. In the case of the bullish three-line strike, history shows us that it’s much better to anticipate volatility than to expect continuation–at least in the short term.

Data-driven traders should capitalize on this volatility using bullish and bearish mean reversion strategies. You should also capitalize on my work, where I cover even the most advanced candlestick patterns.