Mastering the Game of Trades:
Conquering the Three White Soldiers and Three Black Crows Pattern
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Have you ever heard the one about the Three White Soldiers and Three Black
Crows pattern? No, it’s not the name of a bird-watching club or a band
playing at a medieval fair. It’s a technical analysis tool used in trading,
and it sounds like something straight out of a Game of Thrones episode. But
don’t worry; you won’t need a Valyrian sword to master this pattern. Just a
bit of knowledge, a lot of patience, and the ability to resist the urge to
scream “Fly, you fools!” at your computer screen.
When it comes to
technical analysis in trading, candlestick patterns play an essential role
in predicting future price movements. One such pattern is the three white
soldiers and three black crows pattern. In this blog, we will discuss what
the pattern means and how traders can use it as a trading strategy.
What is the Three White Soldiers and Three Black Crows Pattern?
The
Three White Soldiers pattern is a bullish candlestick pattern that consists
of three long green candles with small or no wicks. Each candle should open
higher than the previous day’s close and close higher than the opening
price.
On
the other hand, the Three Black Crows pattern is a bearish candlestick
pattern that consists of three long red candles with small or no wicks. Each
candle should open lower than the previous day’s close and close lower than
the opening price.
Both
patterns indicate a strong shift in market sentiment, and traders can use
them to predict potential reversals or trend continuations.
Trading Strategy
using the Three White Soldiers and Three Black Crows Pattern:
Traders
can use the Three White Soldiers and Three Black Crows pattern to develop a
trading strategy based on the following steps:
Step 1: Identify the
Three White Soldiers or Three Black Crows Pattern
The first step is
to identify either the Three White Soldiers or Three Black Crows pattern.
Traders can use candlestick charts to spot the pattern.
Step 2:
Confirm the Pattern
After identifying the pattern, traders need to
confirm it by analyzing other technical indicators. They can look for the
following:
Volume: Confirm the pattern with high trading volume,
indicating increased market participation.
Moving Averages: Use moving
averages to confirm the pattern. Traders can use simple moving averages
(SMA) or exponential moving averages (EMA).
Step 3: Enter a Trade
After confirming the pattern, traders can enter a trade based on the
following rules:
For Three White Soldiers pattern: Traders can enter
a long position at the close of the third candlestick. They could set a
stop-loss below the low of the third candlestick.
For Three Black
Crows pattern: Traders can enter a short position at the close of the third
candlestick. They could set a stop-loss above the high of the third
candlestick.
Step 4: Manage the Trade
Traders need to manage the
trade by setting a profit target and a stop-loss. They can use technical
analysis tools like Fibonacci retracements or support and resistance levels
to set profit targets.
Now we try to use a simple tool to verify this
trading strategy, let’s see how good it will be. This time we pick the V
(stock symbol of Visa Inc.) to take a shoot.
It’s worth noting that
while the Three White Soldiers and Three Black Crows Pattern can be a useful
tool for identifying potential trading opportunities, it should not be
relied on as the sole basis for making trading decisions. Traders should
always conduct their own research and analysis, and consider factors such as
market trends, news events, and economic indicators before making any
trades.
However, in this blog, we plan to test a simple “Three White
Soldiers and Three Black Crows” Trading Strategy exclusively, to get a
direct impression, without any help or correction from other indicators,
about the effectiveness of a pure Three White Soldiers and Three Black Crows
strategy.
Let’s download the “Three White Soldiers and Three Black
Crows” Trading Strategy backtesting tool from this link. It’s an Excel Macro
that’s very easy to use. For this trial, let’s pick V (stock symbol of Visa
Inc.) to be the target. We’ll import V’s historical data, keeping around
3,300 days’ worth and removing the remaining. The settings will be as
follows:
In the “Pick” worksheet, set the Principal at cell B18 (typically set at
100,000), and the Training % at cell B16 (normally set at 70).
Set the SMA at cell B2 (normally set at 5), and the Expiration
at cell B7 (normally set at 3).
Fill the Optimization Factor value in
cell B34. This value is specific to each stock and is calculated based on
its unique features. It influences the Trigger and Momentum used during the
backtesting VBA Macro. Users can follow us for getting the newest unique
Optimization Factor for particular stock.
Now, let’s go to the “Scan”
worksheet, set the scan ranges for Take Profit, Stop Loss, and Momentum,
etc. The “Scan” worksheet looks like below:
The
backtesting VBA Macro will try every combination, such as Take Profit at 3%,
Stop Loss at 12%, and Momentum (a standard to trigger the Buy or Sell
actions) at 5, etc. This tool will execute these conditions to simulate a
series of trading actions using historical data from the beginning, opening
and closing long or short positions based on the signals generated by your
trading strategies.
To run the VBA Macro program, there are several methods,
for example, we can:
1. Click on the “View” tab on the Excel ribbon.
2. Click on the “Macros” button in the “Macros” group. This will open
the “Macro” dialog box.
3. In the “Macro” dialog box, select the
Macro that you want to run.
4. Click on the “Run” button.
We
can also press Alt + F8, the “Macro” dialog box will jump out, select the
Macro, then click the “Run” button.
The fastest method is using
shortcut hot keys: Press Ctrl + Y, the Macro will run immediately.
After running the VBA tool, we will get a curve in “Chart” worksheet like
this:
After a long run, since 2010–01–04 to 2023–04–03, which is a total of
3335 trading days, and with the following parameters set: Momentum at 0.2,
Take Profit at 20%, Stop Loss at 15%, we will get an Annual ROI at 17.2%,
compared to S&P 500 Index’s average of 7%, it sounds impressive, eh?
During this period, there were 23 trades completed,
with 15 of them being long positions and 8 of them being short positions.
Stop loss was triggered 6 times, while take profit was achieved 16 times, 1
position is not closed yet. The ratio of stop loss vs. take profit was 26%
vs. 70%. On average, it took 145 days to complete one full round of buying
and selling.
In conclusion, the Three White Soldiers and Three Black
Crows Trading Strategy works well for V. However, the transactions (which
occurred 23 times over a 13-year period) are too few to provide strong
evidence of the strategy’s repeatability.
Before you feel
disappointed, let’s take a look at another chart:
Since
2013–08–08 to 2023–01–24, the backtesting Annual ROI of TSLA using the
“WhiteSoldiers_BlackCrows” VBA Macro has been as high as 39.97%, and it has
gained a total of 2301.07%. This performance is not only better than Warren
Buffett’s average of 17%, but also higher than the original Tesla stock’s
ROI of 32.27% during the same period.
See?
The “Three White Soldiers and Three Black Crows” trading strategy works just
so-so for V, but very well for TSLA. For different targets, the weapon has
different results. Different stocks may respond differently to various
trading strategies. Without proper backtesting, you will never know which
stock is sensitive to which trading strategy. The transactions (which
occurred 77 times over a 13-year period, it took 31 days to complete one
full round of buying and selling) are good enough to provide strong evidence
of the strategy’s repeatability for TSLA. If this strategy shows such
quality while working solely, it is qualified to be one part of materials in
a trading strategy that integrates other indicators or patterns of the same
quality, and has the potential to be combined with other good indicators or
patterns to create a stronger trading strategy.
 In conclusion, using the Three
White Soldiers and Three Black Crows pattern can help traders predict
potential reversals or trend continuations. Just remember, this pattern
won’t guarantee success, and you might still end up with losses. But, hey,
at least you can impress your friends by telling them you know about a
trading strategy that involves soldiers and crows. And who knows, maybe
you’ll even start a new trend in the trading world by naming other
candlestick patterns after fictional creatures. The Three Dragon Eggs or the
Four Unicorn Horns, anyone? Just kidding, please don’t take that seriously.
Let’s stick to the tried-and-true methods for now. Happy trading, and may
the bulls be ever in your favour!
Click
LIGHTING THE PATH TO PROFITABLE TRADING: A Step-by-Step Guide to Building a Trading Strategy Verification Tool with VBA Macros to get the whole tutorial handbook for free!
And click Free Trial to download other strategies testing tools, all for a 30-day Free Trial.
Click on Subscription to order more strategies testing tools to help your stock trading.
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