The three black crows Japanese candlestick pattern works in the stock market but occurs too infrequently in the forex and crypto markets to produce statistically significant results.
A trader can expect to gain $6.20 on average per $100 risked using an optimal risk-reward ratio.
But what would you think if I told you that there’s a better way to trade this pattern?
Keep reading to learn how to trade the three crows in a profitable, data-driven way.
What Is a Three Black Crows Candlestick Pattern?
The three black crows candlestick pattern is a four candle bearish reversal pattern and is valid only during an uptrend. It tells us that the momentum is likely shifting due to consistent selling pressure, and traders should manage their positions accordingly.
Let’s dig in a little deeper and learn how to identify this pattern in our candlestick charts.
How to Identify the Three Black Crows Pattern?
Traders can quickly identify this four candle pattern by looking for three bearish candles that resemble a staircase following a bullish candle. Generally, the real body of these three consecutive bearish candles is slightly longer compared to other recent candles.
The following are the requirements for a valid three black crows pattern:
- The first candle is bullish in the direction of the prevailing trend.
- The next three candles consist of three consecutive long-bodied bearish candlesticks.
- Each bearish candle must have no or very short lower shadow.
- The bearish candles must open within the real body of the previous candle.
- The bearish candles must close lower than the previous candle.
- The market must be in an uptrend.
An uptrend consists of higher highs and higher lows on the selected timeframe. The three black crows pattern is invalid if it forms during a sideways market or a downtrend.
Moving averages can help traders smooth out the price action to determine uptrends and downtrends.
The three black crows pattern indicates the potential shift of market control from the buyers to the sellers. The ability of the consecutive candles to close lower reinforces the underlying strength of the sellers.
Additionally, the length of the real body of the three bearish candles is similar, showing the consistency of the sellers’ strength.
For the uninitiated, the real body of a Japanese candlestick chart represents the part of the candle between its opening and closing price. Additionally, the upper and lower shadows, also known as candle wicks, represent the distance from the low and high to the real body.
Upper wicks indicate the presence of buyers in the market being pushed back by the seller’s strength, and lower shadows demonstrate that sellers are being pushed back by buyers.
With an understanding of how to identify three black crows patterns, let’s learn how to trade them optimally.
How to Trade The Three Black Crows Pattern
Traders should trade the three black crows candlestick pattern in the stock market using a bearish mean reversion strategy using a risk-reward ratio of 1:1 optimized by profit per bar.
Traders should trade the three black crows with caution in the crypto and forex markets as there is insufficient data to analyze profitability with statistical significance.
Let’s cover how traders traditionally trade the three black crows, and then we’ll discuss how a data-driven trader like yourself should trade it.
Three Black Crows Bearish Reversal Trade Setup
The NetApp (NTAP) daily chart on 2014-12-26 shows the three black crows pattern in action.
Firstly, the market was in an established uptrend by making higher highs and higher lows, and the close price is above the 50-day moving average, thus validating the pattern’s prerequisite.
Additionally, we see that the first candle before our bearish staircase is green in the direction of the existing trend.
Secondly, the first bearish candle closed lower than the previous bull candle with no lower wick showing sellers beginning to enter the market. However, the bear candle at this point may look like a retracement. A retracement refers to a short period of price movement against the trend that eventually resumes.
The second bearish candle opened within the prior candle’s real body and closed lower with a small lower shadow. This candle further confirmed the presence of the sellers in the market and their strength.
The fourth candle of this bearish candlestick pattern closed below the closing price of the prior candle with almost no lower wick. The ability of sellers to dominate three consecutive trading sessions shows the strength of sellers.
With the signal set, how do traders traditionally trade this pattern?
Traders enter the market with a sell position at the fourth candle’s low and place a stop loss above the high of the pattern’s second candle, which is the first bearish bar.
This is one of the few times that conventional trading wisdom is correct, and the pattern does produce profits; however, there’s a better path to profits.
Three Black Crows Bearish Mean Reversion Trade Setup
The Brookfield Energy Partners (BEP) daily chart on 21 Dec. 2017 shows the three black crows bearish mean reversion in practice.
The close price is above the 50-day moving average, constituting an uptrend. The first bar is bullish, followed by the three bearish “staircase” pattern.
We want to anticipate a mean reversion trade with the three black crows identified.
Savvy traders enter at the high of the 4th candle and set a stop loss one ATR above the 2nd candle.
So how much more money do these data-driven traders make?
Let’s find out.
Does the Three Black Crows Candlestick Pattern Work?
I backtested the three black crows 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.
- The ATR period is equal to the number of bars in the pattern.
- Confirmation must occur within three days of the pattern signal.
- I tested risk-reward ranges from 1 to 5.
- The optimal risk-reward ratio is selected using profit per bar.
Three Black Crows Bearish Reversal Backtest Results
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | three black crows | three black crows | three black crows |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 4 | 4 | 4 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bearish reversal | bearish reversal | bearish reversal |
| stop_bar_type | high | high | high |
| entry_bar_type | low | low | low |
| risk_reward | 1 | 0 | 1 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 379 | 1351 | 6508 |
| pattern_tickers | 1 | 0 | 89 |
| patterns | 5 | 0 | 189 |
| trades | 0 | 0 | 155 |
| confirm_perc | 0 | 0 | 0.82 |
| wins | 0 | 0 | 81 |
| losses | 0 | 0 | 74 |
| win_perc | 0 | 0 | 0.523 |
| avg_win_bars | 0 | 0 | 9.65 |
| avg_loss_bars | 0 | 0 | 11.43 |
| cons_wins | 0 | 0 | 3 |
| cons_losses | 0 | 0 | 3 |
| edge | 0 | 0 | 0.043 |
Three Black Crows Bullish Continuation Backtest Results
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | three black crows | three black crows | three black crows |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 4 | 4 | 4 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bullish continuation | bullish continuation | bullish continuation |
| stop_bar_type | low | low | low |
| entry_bar_type | high | high | high |
| risk_reward | 1 | 0 | 1 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 379 | 1351 | 6508 |
| pattern_tickers | 1 | 0 | 89 |
| patterns | 5 | 0 | 189 |
| trades | 5 | 0 | 102 |
| confirm_perc | 1.0 | 0 | 0.54 |
| wins | 0 | 0 | 6 |
| losses | 5 | 0 | 96 |
| win_perc | 0 | 0 | 0.059 |
| avg_win_bars | 0 | 0 | 1.0 |
| avg_loss_bars | 1.0 | 0 | 1.02 |
| cons_wins | 0 | 0 | 1 |
| cons_losses | 5 | 0 | 3 |
| edge | -1.0 | 0 | -0.881 |
Three Black Crows Bearish Mean Reversion Backtest Results
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | three black crows | three black crows | three black crows |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 4 | 4 | 4 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bearish mean reversion | bearish mean reversion | bearish mean reversion |
| stop_bar_type | atr | atr | atr |
| entry_bar_type | high | high | high |
| risk_reward | 1 | 0 | 5 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 379 | 1351 | 6508 |
| pattern_tickers | 1 | 0 | 89 |
| patterns | 5 | 0 | 189 |
| trades | 1 | 0 | 59 |
| confirm_perc | 0.2 | 0 | 0.31 |
| wins | 0 | 0 | 12 |
| losses | 1 | 0 | 47 |
| win_perc | 0 | 0 | 0.203 |
| avg_win_bars | 0 | 0 | 45.0 |
| avg_loss_bars | 3.0 | 0 | 21.51 |
| cons_wins | 0 | 0 | 1 |
| cons_losses | 1 | 0 | 2 |
| edge | -1.0 | 0 | 0.215 |
Three Black Crows Bullish Mean Reversion Backtest Results
| crypto | forex | stock | |
|---|---|---|---|
| pattern_name | three black crows | three black crows | three black crows |
| pattern_category | bearish reversal | bearish reversal | bearish reversal |
| pattern_bars | 4 | 4 | 4 |
| required_trend | uptrend | uptrend | uptrend |
| traded_as | bullish mean reversion | bullish mean reversion | bullish mean reversion |
| stop_bar_type | atr | atr | atr |
| entry_bar_type | low | low | low |
| risk_reward | 2 | 0 | 1 |
| timeframe | 2015-2021 | 2010-2021 | 2000-2021 |
| bar_period | daily | daily | daily |
| total_tickers | 379 | 1351 | 6508 |
| pattern_tickers | 1 | 0 | 89 |
| patterns | 5 | 0 | 189 |
| trades | 5 | 0 | 186 |
| confirm_perc | 1.0 | 0 | 0.98 |
| wins | 4 | 0 | 113 |
| losses | 1 | 0 | 73 |
| win_perc | 0.8 | 0 | 0.608 |
| avg_win_bars | 2.25 | 0 | 3.0 |
| avg_loss_bars | 6.0 | 0 | 3.62 |
| cons_wins | 1 | 0 | 4 |
| cons_losses | 0 | 0 | 2 |
| edge | 1.4 | 0 | 0.218 |
The Bottom Line
The three black crows pattern works as intended when traded traditionally, but barely – but it does make intuitive sense.
Three bearish bars of consistent selling often means the narrative has likely changed, but going short after such a bearish move is risky due to potentially oversold conditions.
Instead, trade the bounce and then go short. The data supports this, and it also makes intuitive sense.
Want to become a profitable trader?
Have a data-driven approach and only trade the best candlestick patterns.
