In Technical analysis, there are candlestick patterns that are rare to spot, and when they are spotted, they indicate a strong directional movement of the type of pattern. And one such pattern is the Three Star North candlestick pattern. It is a powerful candlestick pattern indicating a strong bearish reversal in the ongoing trend with three consecutive bullish candles.
In this article, we will cover the Three Star North candlestick pattern, its structure, the psychological pattern of candlesticks, how to trade the pattern with an example, and its advantages and disadvantages.
What are the Three Star North candlesticks
The Three Star North candlestick pattern signals a strong potential bearish reversal of the trend by a three-candlestick formation to indicate the strong downtrend ahead.
The term “Star” refers to the small-bodied candlestick describing the indecision in the ongoing trend, and “North” refers to the prior direction of the downward trend.
The three consecutive small-bodied bullish candlesticks represent the weakening of the bullish movement, and a strong bearish reversal is upcoming.
Structure:
The Three Star North pattern is spotted at the top of the price chart.
- First Candlestick: A large bullish candlestick is formed with a long upper wick..
- Second Candlestick: A small bullish candlestick is formed that opens below the closing of the first candle and closes above it with a short wick on top of the candle.
- Third Candlestick: A small bullish candlestick is formed that opens below the closing and closes above the closing of the second candlestick with either no wicks or very small wicks on either side.
Psychology Pattern behind the Three-Star North candlestick:
- Bullish Candlestick: The security is in an uptrend, and a strong bullish candlestick is formed, indicating the uptrend is expected to continue. Slowly, sellers begin to step into the trade, rejecting the high of the first candlestick, forming a long upper wick.
- Indecision candlestick: The second candlestick opens bullish with a slight gap down, and sellers have started to make their position against the trend. Buyers fail to push new highs, resulting in a small bullish candlestick, and the buyers are slowly losing control over the trend.
- The Weak bullish candlestick: At the third candlestick, the buying and selling pressure continues as Buyers fail to push new highs, resulting in a small bullish candlestick that opens with a slight gap down below the high and closes above the low of the second candlestick, and with very small or no wicks are formed on either side of the candlestick.
How to trade the Three Star North candlestick
The Three Star North candlestick is versatile across all the frames.
After spotting the Three Star North candlestick at the top of the uptrend, plan for a short position entry after the confirmation.
Entry:
- Enter a short trade in the security at the open price of the candle after the pattern formation.
Stop-loss:
- The stoploss for the trade can be placed at the high of the three stars north candlestick pattern formed.
Target:
- The primary target is the next support line, or you can set the target for the trade according to your risk-reward ratio.
- If you spot any candlestick pattern formed signalling a bullish reversal, after the confirmation candlestick, plan to book partial profits or trail the stop-loss.
Example scenario:
In the image below, you can look at the chart of “Deepak Nitrite Ltd” stock at a 1-hour timeframe on 15th September 2022, and you can see the sell signal generated by the Three Star North candlestick pattern.
What are the advantages of the Three Star North candlestick pattern
- The Three Star North pattern helps traders to reduce overtrading as it is not often spotted.
- The Three Star North pattern is versatile across all timeframes and security trading markets, as a single strategy applies to all markets.
- The Three Star North pattern provides a clear understanding of the psychology of the price action.
- The Three Star North pattern provides a clear understanding of optimal entry and exit points, keeping the risk minimal.
What are the disadvantages of the Three Star North candlestick pattern
- The Three Star North pattern signals a strong potential reversal, but does not describe the strength of the upcoming trend.
- The confirmation of the reversal is dependent on the following candlesticks formed after the Three Star North pattern.
- In a sideways market, due to a lack of volume, the Three Star North pattern can produce false signals.
In Closing
In this article, we covered the Three Star North candlestick pattern, its structure, the psychology of the pattern, how to trade it, along with an example, its advantages, and disadvantages.
The Three Star North pattern is a powerful candlestick signalling a strong bearish trend reversal in an ongoing uptrend, and at the same time, it offers limited opportunities for beginners with clear entry and exit signals. This makes it a relatively more reliable pattern to trade.
Your profitability depends on your approach to the trade, your risk management, and your mindset when you are holding the trade, as no indicator or tool is 100% accurate, and when the Three Star North candlestick pattern is combined with additional indicators or tools (RSI, MACD, or others), its efficiency and accuracy increase rapidly.
