The Three Black Crows is a Japanese candlestick pattern used primarily for technical analysis as a bearish reversal signal. Below is a detailed explanation of this pattern and its trading strategies.

The Three Black Crows is a bearish reversal pattern that typically appears after an uptrend, indicating rejection from higher prices. This pattern suggests a potential downtrend and is a classic example of a reversal pattern.

How to Identify the “Three Black Crows” Candlestick Pattern?

The Three Black Crows consists of three consecutive bearish candles:

• Three Consecutive Bearish Candles: Each candle has a lower close than open.
• Large Candle Bodies: The bodies of the candles are relatively large compared to their wicks.
• Small or Non-existent Wicks: The wicks are usually short or absent.

Variants of the “Three Black Crows” Candlestick Pattern

In practice, the Three Black Crows pattern may appear with some variations:

• Large Gaps Between Candles: There may be significant gaps between the close of one candle and the open of the next.
• Decreasing Candle Size: The size of each successive candle may decrease, indicating a gradual weakening of market momentum.

How to Trade

To trade the Three Black Crows pattern, it's not enough to just find a series of candles with the same shape. The effectiveness of the pattern depends on its location. A valid signal occurs when the pattern forms after an uptrend, and a bearish reversal is anticipated.

Trade Entry: Enter a short position when the low of the last candle in the pattern is broken. A stop loss should be set to manage risk, typically placed on the opposite side of the pattern.

Trading Strategy

Strategy 1: Pullbacks on Naked Charts

Overview: As a bearish reversal pattern, Three Black Crows is effective during a downtrend.

Implementation Steps:

• Observe if the price is in a downtrend and wait for a pullback.
• Watch for the appearance of Three Black Crows during the pullback.
• Consider entering a short position at the end of the pullback.
• Set a stop loss above the pattern and establish a target price below.

Strategy 2: Trading with Resistance Levels

Overview: Resistance levels are key areas for identifying price reversals.

Implementation Steps:

• Mark key resistance levels on your chart.
• Wait for the price to rise to these resistance levels.
• Check for the formation of Three Black Crows at these levels.
• Short when the price breaks below the low of the last candle in the pattern.
• Set stop loss above the resistance level and determine target price below.

Strategy 3: Trading with Moving Averages

Overview: Moving averages help in identifying trend reversals.

Implementation Steps:

• Identify a downtrend where the price is below a moving average.
• Wait for the price to rise and touch the moving average.
• Look for Three Black Crows forming at the moving average.
• Short when the price breaks below the low of the last candle.
• Set stop loss above the moving average and set target price below.

Strategy 4: Trading with RSI Divergence

Overview: RSI divergences can confirm market trends.

Implementation Steps:

• Identify an uptrend and mark the highs in the price.
• Compare these price highs with the RSI indicator.
• Look for a situation where the RSI makes lower highs while the price makes higher highs (bearish divergence).
• When Three Black Crows forms at a higher high price, aligned with an RSI lower high, consider entering a short position.
• Set stop loss above the pattern and establish target price below.

Strategy 5: Trading with Fibonacci Retracement

Overview: Fibonacci retracement levels identify potential reversal points.

Implementation Steps:

• Identify a downtrend or the beginning of one.
• Wait for a price movement upwards.
• Draw Fibonacci levels from the high to the low of the move.
• When the price hits a Fibonacci level and forms Three Black Crows, short the position.
• Set stop losses above the Fibonacci level and target further declines.

Strategy 6: Trading with Pivot Points

Overview: Pivot Points are automatic support and resistance levels.

Implementation Steps:

• Activate Pivot Points on your chart.
• Determine which Pivot Points are above the current price, as these act as resistance.
• Wait for a price move up to a Pivot Point level.
• If Three Black Crows appear at that level, short the position.
• Set stop losses above the Pivot Point and target lower price levels.

Conclusion

The Three Black Crows is a powerful bearish reversal pattern that signals a potential shift from an uptrend to a downtrend. By employing various trading strategies and technical indicators, traders can improve the accuracy of their trades and achieve better trading results.