Three Black Crows: Concept, Structure, How to Identify and Applications

Three Black Crows pattern is a bearish reversal candlestick pattern in technical analysis, helping investors identify signals of a weakening uptrend. When this pattern appears on the chart, it warns of a potential strong downtrend in the market.

Understanding the characteristics, identification methods, and applications of the Three Black Crows pattern will help you make accurate trading decisions, avoid risks, and maximize profits. According to FOREX89, this bearish reversal pattern is highly regarded for its ability to signal a potential market downturn when identified correctly. Let’s explore this candlestick pattern in detail below!

What is the Three Black Crows?

The Three Black Crows is a Japanese candlestick pattern that signals a trend reversal from bullish to bearish. It is a strong indication of the weakening buying pressure and the dominance of sellers, often appearing after a price rally. When this pattern forms, it suggests a high probability that the market is entering a sharp downtrend. According to IC Markets, combining the Three Black Crows with other patterns like the Three White Soldiers can provide a comprehensive view of market reversals and improve trading accuracy.

The Three Black Crows pattern originates from Japanese technical analysis, developed by rice merchants in the 18th century. This concept was widely introduced to modern investors thanks to Steve Nison, who researched and brought Japanese candlestick patterns to the Western world.

Example: Suppose XYZ stock is in an uptrend, reaching a peak price of $100. Over the next three trading sessions, the Three Black Crows pattern appears with the following characteristics:

• Day 1: A red (bearish) candle forms, closing lower than its opening price.
• Day 2: The second bearish candle opens near the previous day’s closing price, indicating that sellers continue to dominate.
• Day 3: Another strong bearish candle appears, confirming the downtrend and signaling a potential continuation of the price decline in the coming sessions.

Now that we have understood the concept of the Three Black Crows pattern, let’s delve deeper into its structure to accurately identify key characteristics and determine bearish trends effectively.

Structure and Significance of the Three Black Crows

The Three Black Crows pattern is one of the strongest bearish reversal candlestick signals, appearing after an uptrend and indicating the dominance of sellers. To accurately identify this pattern in technical analysis, it is essential to understand its structure and significance.

Structure of the Three Black Crows Pattern

The Three Black Crows pattern consists of three consecutive bearish candles, each with the following characteristics:

First Candle – Initial Signal of the Downtrend

• Appears after an uptrend.
• A strong bearish candle with a long body, closing near its lowest price.
• Indicates that selling pressure is starting to dominate, signaling weakness in the previous uptrend.

Second Candle – Strengthening the Downtrend

• Opens near the closing price of the previous candle.
• Continues as a strong bearish candle, confirming that sellers are in control.
• If this candle has a long body and minimal wicks, it indicates a strong downward Momentum.

Third Candle – Confirming the Downtrend

• The third candle continues the bearish trend, opening near the closing price of the second candle.
• Closes lower than the previous two candles, confirming the formation of a new downtrend.
• Its length may be similar to or slightly shorter than the previous two candles.

Significance of the Three Black Crows Pattern

• Confirms a bearish trend: The Three Black Crows pattern is a strong signal that the market has entered a downtrend, indicating that the previous uptrend has ended.
• Indicates increasing selling pressure: This pattern shows that sellers have complete control, pushing prices down continuously over three trading sessions. The appearance of three consecutive bearish candles also eliminates bullish sentiment.
• Predicts further price declines: When the Three Black Crows pattern appears, there is a high probability that prices will continue to fall in the upcoming sessions. Traders can use this signal to close long positions or open short positions.
• Confirms a reversal signal: The three consecutive red candles strongly indicate an upcoming bearish trend. However, to minimize risks, traders should combine this pattern with other technical indicators such as RSI, MACD, or trading volume to confirm the signal before making a trade.

Now that we have a clear understanding of the structure and significance of the Three Black Crows pattern, let’s explore how to identify it in real market conditions, helping you effectively apply this pattern in trading strategies.

How to Identify the Three Black Crows Pattern in Real Market Conditions

The Three Black Crows pattern is a strong bearish reversal signal, helping traders identify when the market may be transitioning from an uptrend to a downtrend. Below is how to accurately recognize this pattern in real trading scenarios.

Appears After an Uptrend

Three Black Crows pattern is only significant when it appears after a clear uptrend. It provides a strong reversal signal, indicating that sellers have regained control of the market. If this pattern appears within an extended downtrend, it may only be a temporary pullback rather than a confirmed reversal.

Three Consecutive Bearish Candles with Long Bodies

The most important characteristic of the Three Black Crows pattern is the presence of three consecutive bearish candles with long bodies and short wicks. This demonstrates the dominance of sellers, causing the closing price to be consistently lower than the opening price in each session.

• First Candle: The initial bearish candle signals the weakening of buying pressure.
• Second Candle: Continues to decline, with an opening price near the previous candle’s closing price.
• Third Candle: Further reinforces the downtrend, indicating that the market may continue to drop.

Indicates Strong Selling Pressure

In the Three Black Crows pattern, selling pressure is usually very strong, often reflected in higher-than-usual trading volume. This suggests that investors are selling aggressively, fearing a potential market reversal.

Once you have learned how to identify the Three Black Crows pattern on a price chart, the next step is to apply it effectively in trading. So how can you take advantage of this pattern efficiently? Let’s explore that in the next section.

Applying the Three Black Crows Pattern in Stock Trading

The Three Black Crows pattern is not just a bearish reversal signal but also a valuable tool that helps traders make effective trading decisions. Below is how to apply this pattern in real-world trading scenarios.

Entry Strategy: Sell When the Third Candle Closes

When the Three Black Crows pattern appears on the price chart, traders may consider entering a short position after the third candle closes. The reason is that, at this point, the downtrend is confirmed, reducing the risk of entering too early.

Take Profit and Stop Loss: Identify Key Support Levels

• Take Profit: Traders can set their profit targets at the nearest support levels. If the price continues to decline sharply, holding the position longer may maximize profit potential.
• Stop Loss: To manage risk, the stop-loss level should be placed just above the highest point of the Three Black Crows pattern. If the price unexpectedly reverses upward, the Stop loss order will help protect the trading account from significant losses.

Combining with Technical Indicators: MACD, RSI, MA

To confirm the signal from the Three Black Crows pattern, traders should combine it with other technical analysis tools:

• MACD: If the MACD line crosses below the signal line, it strengthens the bearish signal.
• RSI: When the RSI indicator falls below 50, it indicates that the downtrend is gaining strength.
• Moving Averages (MA): If the price breaks below key moving averages such as the 50-day MA or 200-day MA, this serves as a strong confirmation of the bearish trend.

The Three Black Crows pattern is one of the most powerful bearish reversal candlestick formations, providing traders with critical signals about the weakening of an uptrend. When it appears, it serves as a warning that the market may enter a correction or a deeper decline. Understanding and correctly applying the Three Black Crows pattern will help you make accurate and safer investment decisions in the highly volatile financial markets.