Three-Line Patterns

You must have employed a variety of candlestick patterns to determine the momentum and direction of a stock’s price if you are a stock market trader who believes in short-term trading based on technical tools. While some candlestick patterns feature two candlesticks, others may just have one. However, you’ll be surprised to learn that several candlestick patterns with three candlesticks give traders greater confidence when placing bets. 

In this blog, we will explain the top 7 three-line patterns and the advantages and disadvantages of using such patterns.

What are Three-Line patterns?

The combination of three successive candlesticks that predict a continuation or a reversal of an ongoing trend in an asset price is known as the “three-line” pattern. Compared to the two-line pattern, these patterns are uncommon. When combined with other technical indicators, these patterns are very accurate in predicting future price movement, boosting investor confidence.  

Top 7 Three-Line Patterns

The top 7 Three-line patterns are mentioned below:

1. Three White Soldiers Pattern – The Three White Soldiers can be used to predict a significant upswing following a consolidation or downtrend. Three consecutive long white or bullish candles make this pattern, with all the successive candles opening inside the previous candle’s body and closing steadily higher. Since there is no or very little wick on any of the candles, the buyers continue the bullish trend throughout the session. The candlestick pattern indicates a significant change in market sentiment from bearish to bullish. 

2. Three Black Crows Pattern – Three Black Crows is a bearish reversal candlestick pattern that suggests a downturn may begin after a period of uptrend or consolidation. The pattern consists of three consecutive long red or bearish candles that close steadily lower than the previous candle, indicating selling pressure. When traders spot this pattern, they use it with other technical tools to create a short position. 

3. Evening Star Pattern – The evening star candlestick pattern is a bearish reversal pattern that indicates a potential shift from a bullish to a bearish trend at the apex of an upward trend. The pattern consists of three candles: a long bullish candle, a small body candle that can be either bullish, bearish, or Doji and a long bearish candle. The bearish candle appears at the top of an uptrend and closes above the low of the first bullish candle, which marks the start of a downtrend.

4. Morning Star Pattern – A Morning Star pattern is a bullish reversal candlestick pattern that indicates the end of a downward trend and the start of a potential upward trend in the stock price. This pattern usually appears at the bottom of a downward trend and comprises three candlesticks. The first candle is a long, bearish candle that indicates intense selling pressure and the continuation of the downward trend. The second candle could be a Doji, bullish, or bearish candle with a small body, indicating that the intensity of the downturn is decreasing. The third candle is a bullish candle that closes below the high of the first bearish candle, suggesting buyers are pushing the price upward.  

5. Three Inside Up Pattern  – Three Inside Up is a bullish reversal pattern that indicates a shift in a stock price’s momentum from downward to upward. Traders utilize this candlestick pattern to predict when a downward trend is about to reverse, and buyers are taking control of the stock. This pattern shows that the bears are in control, as the first candle is bearish. The second candle is bullish and forms within the range of the first candle. The third candle is bullish and closes above the first candle’s high, indicating a successful bullish reversal. 

6. Three Inside Down Pattern – This candlestick pattern is a type of bearish reversal pattern and usually forms near the peak of an upward trend, suggesting that the momentum may be turning bearish. The three candles in this pattern indicate that sellers are starting to enter the market and buyers are losing power. Based on the first bullish candle, the buyers appear to be active and in control. The second candle, a bearish little candle, forms within the body of the previous one and shows that buyers are losing ground to sellers. The last or third candle is bearish and closes below the first candle’s low, which confirms that the sellers are in control.

7. Abandoned Baby Candlestick Pattern – The abandoned baby candlestick pattern is a reversal candlestick pattern that can show up in both up-trend and down-trend markets and suggests either a bullish or bearish price reversal. Since this pattern contains a noticeable gap between the second and the other two candles, traders view it as highly dependable. However, these patterns are extremely uncommon. A Doji candle, which has no overlap with the first and the third candle, will be the second candle. The first candle may be very bullish or bearish. The third candle is the exact opposite candle of the first candle. The third candle also forms a gap with the second candle, i.e. if it is bullish, it gaps up from the Doji, indicating a price reversal; if it is bearish, it gaps down from the Doji.  

Advantages of Using a Three-line Pattern

The significant advantages of using a three-line candlestick pattern are as follows-

• Trend Reversal – The three-line pattern indicates a significant shift in a stock’s momentum, which can help a trader predict a downtrend or an uptrend.
• Increased Accuracy – Chart patterns consisting of three candles are usually more accurate than two-line patterns.
• Entry and Exit – After properly analyzing the three-line candle stick pattern, traders can plan a better entry and exit point and adjust their strategies accordingly.
• Timeframe – The three-line pattern can be used in various time frames, such as daily, hourly, weekly and monthly.
• Market Sentiments – This pattern reflects the market sentiment, which helps traders accurately predict future price movements.
• Identification – Due to their simplicity, three-line candlestick patterns are easy to identify for both experienced and new traders.

Disadvantages of using a three-line pattern

The significant disadvantages of the three-line candlestick pattern are as follows-

• False Signal – The three-line candlestick pattern sometimes might give a false signal due to volatility in the market, low volumes or other factors.
• Lagging Indicator – As it takes three candles to form a three-line pattern, it lags behind the market. A trader waiting for the pattern to complete may miss a major portion of price movement.
• Dependency – This pattern depends on other indicators for confirmation, such as RSI, MACD, etc.
• Magnitude – Three-line patterns do not provide details about the strength and duration of the trend.
• Rare– These patterns are rare to find, which makes backtesting trading strategies based on these patterns extremely difficult.

Conclusion

To sum up, traders utilize a variety of patterns found in the field of technical analysis to determine a stock’s future price movement. Some of the most popular patterns among these are the three-line patterns. The Three-Line pattern consists of three candlesticks, which makes them more reliable in predicting price movement than two-line patterns. However, it is difficult to find a three-line pattern, and traders may miss out on a trading opportunity while waiting for a pattern to form completely. It is advised to combine the three-line patterns with other indicators for enhanced accuracy. 

Frequently Asked Questions (FAQs)