The Japanese candlestick chart is one of the most widely used chart types in forex trading, and the reason is simple — the candlesticks form recognizable shapes and patterns that tell a story about who dominated the market in that trading session, which may indicate where the price will go next. If you have been using the candlestick chart, you must have been seeing those patterns and may even understand how useful they can be in trading both ranging and trending markets.
By now, if you have been following our previous posts, you should have a fair knowledge of the common single and double candlestick patterns. So, it is good we now take a look at the triple candlestick patterns since, involving three consecutive trading sessions, they can be one of the most reliable candlestick patterns in the market.
In this post, we will be learning:
- What triple candlestick patterns mean
- The description of the various triple candlestick patterns and what they signify
- How to trade the patterns
- Common mistakes to avoid when trading the patterns
What do we mean by triple candlestick patterns?
As the name clearly suggests, the triple candlestick pattern is formed by three consecutive candlesticks. A candlestick represents a trading session, so a triple candlestick pattern represents what happens in the market over three consecutive sessions and can show who is dominating in the market within those periods. With that information, traders may be able to determine how the price is likely to behave in the next trading sessions.
In other words, different patterns may indicate different price movements. While some triple candlestick patterns may imply a pause in a trend with the potential for the price to continue in the trend direction, others may indicate a potential end of the current price swing and an imminent reversal of the price direction.
When analyzing the significance of a triple candlestick pattern, you need to be able to identify the three consecutive candlesticks that make up the pattern and evaluate their position in the overall market structure.
To identify triple Japanese candlestick patterns, you need to look for specific formations that consist of three candlesticks in total.
The anatomy of the various triple candlestick patterns and what they signify
There are many different triple candlestick patterns, and they are categorized into two: the reversal candlestick patterns and the continuation candlestick patterns.
The triple candlestick reversal patterns
This group is more likely to bring about the reversal of a price swing, and they can have bullish reversal effects or bearish reversal effects. The most popular triple candlestick reversal patterns include the following pairs:
- Morning Star and Evening Star
- Morning Doji Star and Evening Doji Star
- Three White Soldiers and Three Black Crows
- Three Inside Up and Three Inside Down
- Three Outside Up and Three Outside Down
The morning star pattern occurs after a downward price move. Here is how you identify it:
- The first candlestick is bearish and has a long body, in line with the downward price swing
- The second one has a small body and gaps below the first candlestick but the upper wick may close the gap
- The third candlestick is tall and bullish, closing in the upper 1/3rd of the first candlestick
Occurring at the end of a downward move, the morning star pattern has a bullish reversal effect. During the first trading session, the bears were in control, but indecision set in in the second session. By the third trading session, the bulls have stepped up their game to push the price up, making the entire pattern look like a bullish pin bar (with a bearishly colored body) when coalesced into one session.
Just the opposite of the morning star, the evening star pattern forms at the end of an upward price swing. You can identify it as follows:
- The first candlestick is tall and bearish, in line with the upward price movement
- The second one has a small body and gaps above the first candlestick, though, the lower wick may extend into the gap
- The third candlestick is long and bearish, closing in the lower 1/3rd of the first candlestick
The pattern occurs after an upward price swing and has a bearish reversal effect. In the first trading session, the bulls were dominating, but there was indecision in the second session. The bears eventually took control during the third trading session and pushed the price down, with the entire pattern looking like a bearish pin bar (with a bullishly colored body) when coalesced into one session.
Morning doji star
The morning doji star is just like the morning star pattern except that the second candlestick is a doji, which shows a much higher degree of indecision before the bulls took over. It also occurs at the end of a downward price swing and has a bullish reversal effect.
Evening doji star
The evening doji star is very similar to the evening star pattern — the only difference is that the second candlestick is a doji, which implies a greater degree of indecision before the bears eventually stepped in to take control during the third trading session. As with the evening star pattern, this pattern forms at the end of an upward price swing, so it has a bearish reversal effect.
Three White Soldiers
The Three White Soldiers pattern occurs after a downward price swing hits a support zone and the price reverses to the upside. It consists of three consecutive long bullish candlesticks that follow a downswing, and here is how to identify it:
- The first bullish candlestick, also known as the reversal candle, bounces off from a possible support level, indicating that the downward price movement may have ended
- The second candlestick’s body is longer than the first candlestick’s body, and it closes near its high, with a short upper wick
- The third candlestick should be, at least, about the same size of the second candlestick and must close above high of the prior candlestick
The pattern shows that the bulls are taking charge, with the emergence of an upward price swing. Generally, the pattern is stronger if the candlesticks have long bodies with small upper and lower wicks. If the wicks are long, the pattern may not play out well. Beware that if the pattern is overextended, there may be a pullback up to the second candlestick’s open.
Three Black Crows
The Three Black Crows pattern often forms when an upward price swing hits a resistance level, inducing a downward price reversal. The pattern shows that the bears are getting into the market with aggression, as they consistently push the price down in three consecutive trading sessions.
This is how you identify the pattern,
- It consists of three consecutive long bearish candlesticks that follow a downswing
- The first of the bearish candlesticks is known as the reversal candle, and it is seen bounces off the resistance level, signaling the end of the upward price movement
- The second candlestick has a longer body than the first one, and it closes near its low, with a short lower wick
- The third candlestick is, at least, about the size of the second candlestick and must close below high of the prior candlestick
When the candlesticks have long bodies and small wicks, the pattern is believed to be stronger. Longer wicks, especially the lower wicks, show that the bulls are still fighting back. On the other hand, if the price becomes overextended by the time the third candlestick completes, there may be a pullback up to the opening price of the second candlestick.
Three Inside Up
The Three Inside Up pattern forms at the end of a price swing down. It basically consists of an inside bar (harami) pattern and a third candlestick that breaks and closes above the high of the first candlestick (mother bar) of the harami pattern. Here is how to identify it:
- The first candlestick long and bearish, in line with the downward price swing
- The second is a smaller bullish inside bar that passes at least the halfway point of the first bearish candlestick
- The third is another bullish candlestick, which closes above the high of the first candlestick
Similar to the Morning Star, the pattern has a bullish reversal implication that is even stronger than the Morning Star pattern, as the overall closing price of the pattern is above the opening price. So if the entire pattern is analyzed as one trading session, the pattern will appear like a bullish pin bar with a bullish body.
Three Inside Down
The Three Inside Down pattern is seen at the end of an upward price swing, and it consists of a harami pattern with the next candlestick breaking and closing below the low of the mother bar of the harami pattern. Here is how to identify it:
- The first candlestick is a tall and bullish one, in line with the upward price swing
- The second is a smaller bearish inside bar that reaches below the halfway point of the first bearish candlestick
- The third is another bearish candlestick, which closes below the low of the first candlestick
The pattern is similar to the evening star pattern with a bearish reversal implication, but it even has a stronger bearish significance than the evening star pattern because when you consider where the price opened and closed in the entire pattern, you will see that the closing price is below the opening price. Thus, analyzing the entire pattern as one trading session, it will appear like a bearish pin bar with a bearish body.
Three Outside Up
The Three Outside Up pattern is seen at a price swing low, and it’s basically an outside bar pattern followed by a third candlestick that closes above the outside bar. This is how to identify it:
- The first candlestick is small and bearish, in line with the downswing preceding it
- The second is tall, bullish, and completely engulfs the first one
- The third candlestick is bullish and closes above the second one, with the high also extending above the second one’s high
Occurring at swing lows, the Three Outside Up pattern has a bullish reversal effect but is considered less reliable than most of the reversal patterns because volatility has already risen at the beginning of the pattern.
The Three Outside Down pattern forms at the end of an upward price swing. It consists of three candlesticks — an outside bar pattern followed by a third candlestick that closes below the outside bar. Here is how to identify it:
- The first candlestick is small and bullish, in line with the upward price swing preceding it
- The second is a long and bearish candlestick that completely engulfs the first one
- The third candlestick is also bearish and closes below the second one, with the low extending below the second one’s low
The pattern has a bearish reversal effect though not as reliable as most of the reversal patterns because there’s higher volatility at the beginning of the pattern.
The triple candlestick continuation patterns
The patterns in this group are more likely to bring about the continuation of the price movement preceding their formation, and they can be bullish or bearish continuation patterns. These are the common triple candlestick continuation patterns:
- Upside-gap Task
- Downside-gap Tasuki
- Bullish Side by Side White Lines
- Bearish Side by Side White Lines
An upside-gap Tasuki pattern is seen in the impulse waves of an uptrend, and here is how you can recognize it:
- The first candlestick is tall and bullish
- The second one is also a tall and bullish candlestick but gaps up above the first one
- The third candlestick is bearish and extends into the gap, partially filling it
The pattern signifies that there is a pause in an up-trending market as a result of profit-taking but the bulls are still in control. So, the price is expected to resume the up move soon.
A downside-gap Tasuki pattern is seen in the impulse waves of a downtrend. This is how you can identify it:
- The first candlestick is tall and bearish
- The second one is also tall and bearish candlestick but gaps down below the first one
- The third candlestick is bullish and extend into the gap but does not completely fill it
The pattern shows a pause in a downtrend, which is often as a result of profit-taking. However, the bears are still in control, and the price would soon resume the down move.
Bullish Side by Side White Lines
This continuation pattern is seen in an uptrend, and here is how to identify it:
- The first candlestick is tall and bullish
- The second one is a smaller bullish candlestick that gaps above the first candlestick
- The third candlestick is similar to the second and opens near the second candlestick’s open
The pattern shows that the bulls are very aggressive, but some traders are taking profit, which makes the third candlestick not to advance further. However, the price would eventually continue to advance.
Bearish Side by Side White Lines
The pattern occurs in a downtrend, and you can identify it as follows:
- The first candlestick is a tall, bearish candlestick
- The second one is smaller and bullish and gaps below the first candlestick
- The third candlestick is similar to the second, lying side by side to it
This pattern signifies that although sellers were very aggressive, as indicated by the tall bearish first candlestick and the downward gap, there was heavy profit taking, but the bears weren’t ready to let go.
How to trade the triple candlestick patterns
As you can see, there are two categories of the triple candlestick pattern, and we will discuss them separately.
Trading the triple candlestick reversal patterns
How you trade the triple candlestick reversal patterns depends on the market condition — is the market trending or in a range? But whatever is the market condition, the principle is the same: you use a triple candlestick reversal pattern as a trade trigger when the price is at the right level at the right moment.
In a trending market, you should aim to trade the impulse waves (price swings in the direction of the trend). You want to use the triple candlestick reversal patterns to identify when a pullback is about to reverse and start a new impulse wave. There are three key factors you will need to trade a trending market:
- Identify the direction of the trend: You need to identify whether the trend is upward or downward. A trend line or a moving average indicator can help you with that. In an uptrend, you look for bullish triple candlestick reversal patterns, like the morning star, three white soldiers, three inside up, or three outside up patterns. For a downtrend, you look for bearish reversal patterns, such as the evening star, three dark crows, three inside down, and three outside down patterns.
- Identify an important price reversal level: Another factor is to identify where a pullback is likely to reverse —a potential support area in an uptrend or a potential resistance area in a downtrend. Tools you can use for this include previous swing levels, important round numbers, pivot levels, Fibonacci retracement levels, trend line, and a long-period moving average.
Spot a reversal triple candlestick pattern that serves as your entry trigger: When you have identified the direction of the trend and the price is at a potential reversal level, you can look for the appropriate triple candlestick reversal pattern as your trigger to enter a trade — a bullish pattern around a support level in an uptrend is a trigger to go long, while a bearish pattern around a resistance level in a downtrend is a trigger to go short.
For a ranging market, the approach is similar. The boundaries of the range are potential reversal levels, so you look for the triple candlestick reversal patterns when the price is around the boundaries — bullish patterns at the lower boundary and bearish patterns at the upper boundary.
Some trade examples with triple candlestick patterns
In the Apple chart below, you can see that the moving average was sloping upward (uptrend). A morning star pattern formed as the price bounced off from the moving average (a dynamic support level), which was a trigger to enter a long position when the next candlestick opened. The stop loss can be a few pips below the swing low. Notice the position of the profit target just below a previously known resistance level.
The USDCAD chart below shows a downtrend and an evening star pattern that formed around a descending moving average line (dynamic resistance level). Note the position of the stop loss above the swing high and the profit target —at least 2:1 reward/risk ratio.
In the GBPUSD chart below, you can see a three white soldiers pattern that occurred after a pullback to the trend line in an uptrend. Apart from showing the direction of the trend, the trend line was also acting as a rising support level. Note the position of the stop loss below the swing low and the profit target at x2 of risk.
The USDJPY chart below shows a gradually moving downtrend and a three black crows pattern that formed after a pullback to the descending trend line (resistance level). Note the position of the stop loss above the swing high and the profit target at x2 of the risk.
In this Apple chart, you can see a three inside up pattern that formed at the end of a pullback to the moving average line, which was acting as a support in an uptrend. Note the entry point at the open of the next candlestick, the stop loss below the swing low, and the profit target at x2 of the risk.
The AUDUSD chart below shows a downtrend and a three inside down pattern that formed after a pullback. Note the positions of the stop loss and the profit target.
In this USDCHF chart, you can see that the market was in a range. Observe the morning star pattern at the lower boundary. Note the position of the stop loss below the lowest point of the pattern and the profit target just below the upper boundary.
Trading the triple candlestick continuation patterns
The continuation patterns are better traded in a trending market. However, since the price is already advancing when such patterns appear, it is difficult to place your stop loss behind a reasonable price structure. So, the continuation patterns are good for adding to an already profitable position.
Some of the tools you can use to trade these patterns are the trend lines and moving averages for identifying the trend. You may also use momentum indicators like the MACD to gauge the price momentum when trading these patterns.
In this Apple chart below, you can a bullish side by side white lines in an uptrend (a rising moving average line). Note the rising momentum in the MACD when the pattern formed. A trader who is already in a profitable position may add to his position on seeing that pattern and bring his cumulative stop loss to breakeven.
The AMD chart below shows an upside-gap Tasuki pattern in an uptrend. You can see the corresponding increasing momentum in the MACD when the pattern formed. That is a good place to add to a profitable position while keeping the stop loss at breakeven or a few pips profit.
Common mistakes to avoid when trading triple candlestick patterns
Many traders, especially new traders, make many mistakes when trading candlestick patterns. These are the common ones to avoid:
Trading the patterns on their own
Some traders tend to trade the patterns anywhere and anytime they can identify them. Of course, that would lead to many losing trades. From our discussion so far, the patterns are only as good as the level and the market condition where they occur — they are just a trigger to enter the market when every other thing is in order. They are not to be traded on their own.
Not considering the broad perspective of the market
It is dangerous to trade a price action pattern without considering the broad perspective of the market both on the technical and the fundamental aspects. This is especially important if you are trading the intraday timeframes.
For your technical analysis, you need to step up to higher timeframes to get a broad view of the structure of the market and know where your trade setup falls in the overall market structure. In addition, you should keep an eye on the key economic data releases as some of them can render your setup useless.
There are many triple candlestick patterns, and you cannot possibly trade all of them. Study a few and add them to your trading arsenals. Remember, they are only good as a trade trigger when the conditions are right — don’t trade them on their own.