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It was originally invented by a legendary speculative master in the 18th century and later evolved into a globally adopted method of observing asset prices.
Munehisa Homma, a Japanese rice trader, devised an effective method of using candlestick charts to explain market psychology, which we commonly refer to as 'Japanese candlestick charts.'
Early in his speculative career, Munehisa Homma discovered an important fact: price fluctuations in the market are not merely the result of rational and logical outcomes but are more influenced by human emotions, such as greed and fear. This disruptive realization led him to observe the market in a completely new way.
Let’s take a look at a candlestick pattern with an Eastern flair—the 'three crows.'
Initially, each Japanese candlestick represented a trading day or longer.
In the 18th century, collecting intraday rice price data would have been quite difficult!
Therefore, this article will use the traditional time frame—one day or more.
Japanese candlestick structure
First, let’s briefly introduce candlestick charts.
Each candlestick represents a specific trading period and consists of four parts: opening price, highest price, lowest price, and closing price.
The opening price and closing price are respectively the first and last trade prices of that period.
The highest and lowest prices are the highest and lowest prices during the trading time.
The color of the candlesticks highlights the overall sentiment of the period.
If the closing price is higher than the opening price, the period is bullish, and the candlestick turns white (international markets usually use green for up and red for down; in the Chinese market, it is the opposite, with red for up and green for down).
Conversely, when the closing price is lower than the opening price, bears dominate, and the candlestick turns black.
As the market fluctuates due to supply and demand forces, the shape of the candlesticks will also change.
Let’s take a look at the legend below.
Traders look for candlestick patterns to increase the chances of profitable trades while managing risk and return.
The pattern can consist of up to five candlesticks.
What is the three crows pattern?
This is a bearish pattern that forms after the market is in an uptrend.
Let’s take a look at the attributes of this pattern.
◎ It consists of three consecutive bearish large entity candlesticks.
◎ Each candlestick's closing price is lower than the previous candlestick's closing price.
◎ In classic patterns, each candlestick opens higher than the previous candlestick's closing price.
◎ Each candlestick's high and low points are lower
Below is a diagram of the three crows (see the three candlesticks in the red box)
In the futures market, traders often use volume to confirm the validity of the pattern.
How to do it?
Expert Tip: If the trading volume during the formation of the three crows is relatively higher than the volume of the preceding trend, the pattern is more reliable.
The psychology behind the three crows
A sharp upward trend retracement makes investors nervous—just like the first candlestick of the three crows (see below).
The first step of this pattern typically erases most or all of the gains from the previous uptrend day.
At this point, short-term bulls will seek to join the sellers.
Most people who bought at (1) and the previous day will face losses.
The second day of the pattern (2) opens with a gap up, as bargain hunters are eager to enter on the first trade.
However, the disappointment has become significant enough to offset the initial buying pressure.
Gaps are quickly filled, sellers push prices lower, and the daily close shows an aggressive bearish pattern.
On the third day, this scenario repeats, causing even the most patient bulls to feel frustrated.
Consequently, more selling pressure resulted in a daily close as a 'bearish candle', completing the three crows pattern.
As a result, short-term to mid-term bullish sentiment is severely impacted, as too many buyers incur losses.
1. Correctly view the three crows
Although the three crows pattern is promising, it is just a part of the candlestick chart.
We should use this pattern in the appropriate environment to achieve the best probability.
In fact, many of the things we see on charts that are considered candlestick 'patterns' are nothing more than meaningless jigsaw shapes.
The factors causing this difference are the environment in which the pattern appears.
If you see rain clouds over the tropical rainforest, that’s nothing special—no climate change or other serious issues.
However, the same clouds over the Sahara Desert should raise thoughts and warnings.
Identifying an Uptrend
The three crows appear in a clear uptrend.
How to find an uptrend?
Standard Dow Theory tells us that in an uptrend, prices continue to make higher highs (HH) and higher lows (HL).
Additionally, the trend should last for a considerable amount of time relative to the period in which the three crows form.
It must be clearly shown that this is an established uptrend and that it is undergoing a corrective adjustment in the form of three crows.
The chart below shows an uptrend and the three crows (see the circled area).
Pay attention to the structure of the trend and its duration relative to the three crows.
Use indicators to confirm trends
Technical tools help us perceive price dynamics more objectively.
You might have a feeling about the market.
However, the formula for indicators will show the market from a statistical perspective.
Consider moving averages; when prices are above the MA, the market is in an uptrend (see the chart below).
Conversely, when the price falls below the MA, a downtrend is formed.
Do you see those prices staying above the blue line?
After such confirmation, you can be confident that you are looking for the three crows in the right place.
2. Market Characteristics
Where you look for the three crows is important.
A significant characteristic of this pattern is the consecutive gaps up, which occurs less frequently in the 24-hour fluctuating forex market.
The characteristics of the above classic patterns are more likely to appear in concentrated markets such as stocks or futures.
Why?
Frequent gaps occur in markets where trading takes place during specific trading hours—within the exchange's working hours.
In the forex market, you typically only expect significant gaps on Mondays as the weekly forex market begins fluctuating first in the New Zealand market.
In the forex market, the 'revised version' of the three crows has no gaps (see below).
Conversely, the opening price of each bearish candlestick is usually close to the previous day's closing price (see the above USDCAD chart).
The same situation applies to the cryptocurrency market, as trading can also occur over the weekend.
Let’s take a look at the three crows in the daily chart of Dogecoin.
The advantage of cryptocurrencies is that you can confirm the validity of the pattern with real trading volume, which is not possible in the forex market.
Note: You can still apply this simplified version of the three crows to stocks and futures markets.
The adjusted version is more common and nearly has the same meaning.
3. Three Crows Entry Strategy
This pattern has two main entry techniques.
◎ Sell at the close of the third candlestick
◎ Enter when breaking the low on the third day
Look at the chart below.
Typically, entering at the breakout point will provide a favorable short-term momentum as the stop losses of the bulls are triggered.
Note that in the example above, if you choose the second entry method, you may not be able to execute the trade due to the gap.
Expert Tip: In US stock trading, you can still try to short in the after-hours or pre-market; however, the volume is usually low.
In forex, cryptocurrencies, and even futures contracts, you will not encounter this problem.
4. Setting Risk and Reward
Average returns and win rates largely depend on how you handle stop losses and profit targets.
Please be cautious about this point.
Low-risk reward ratios usually provide a higher win rate.
Conversely, tighter stop losses will reduce the win rate but allow you to achieve multiple risks with high returns in each trade.
Let’s look at several ways to set stop losses and profit targets for the three crows.
In the chart below, we have three possible stop loss positions, respectively above the daily high—SL1, SL2, and SL3.
Assuming we enter at the close of the third day of the pattern.
In this case, we can use Fibonacci retracement levels of 0.5 and 0.618 as targets.
Ultimately, our goal is to exit in the support area of 9.20-9.50, especially if our protective stop loss is at SL3.
5. Trading the Three Crows with Different Time Frames
Switch to a lower time frame to get precise entry with the lowest risk.
In the AUDUSD chart below, we have the three crows on the daily chart and a resistance level on the hourly chart that 'rejects' entry.
Stop losses will be placed above the supply area.
In fact, entering on lower time frames can yield the highest risk-reward ratios.
However, you should ensure you have enough time during the day to monitor price movements and enough time to view charts to identify these entry opportunities.
6. Combining the Three Crows with Other Tools
Is this really three crows?
How can we ensure the highest probability of success for this pattern?
Use other tools to confirm the validity of the pattern with the three crows.
As illustrated by classic support and resistance, helping to filter the best opportunities.
The most reliable three crows appear near these levels.
When the pattern appears, indicators showing crossovers and overbought/oversold conditions can also be helpful.
7. Limitations of the Three Crows Pattern
Although the three crows pattern is a strong bearish reversal signal, its limitations must also be considered. Here are some basic constraints:
◎ False signals: Like other patterns or indicator tools, the three crows pattern also has the potential to give false signals. Sometimes the pattern may form, but the price does not reverse as expected, leading to a false signal.
◎ Market background: Analyzing the three crows pattern in the context of the broader market is crucial. Overall market trends, trading volume, and other technical indicators can provide additional insights and confirmations.
◎ Confirmation signals: Traders often use confirmation signals or indicators to strengthen the analysis of the three crows pattern. Relying solely on this pattern for analysis without considering other factors may increase the risk of false signals.
No single tool can consistently predict market trends accurately. The three crows pattern provides useful warnings of potential trend reversals, but requires confirmation from other evidence. Trade cautiously and follow reasonable analysis and risk management principles.
The three crows pattern is a well-known bearish reversal pattern that traders use to identify potential trend reversals. By understanding the characteristics and limitations of this pattern, traders can make informed decisions and increase the win rate of their trading strategies.
Overall, the three crows pattern shows an increasingly weak trend and implies that subsequent prices may continue to decline.
If this pattern is identified on the chart, it may indicate a short entry point. However, a surge in volume or a breakout of support during the three crows pattern usually enhances the effectiveness of the short strategy.
Thus, when trading the three crows pattern, consider the broader market context, use confirmation signals, and employ appropriate risk management techniques.
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