Three Stars in the South Candlestick Pattern
Candlestick patterns are a popular way of tracking market movement. One such pattern, called three stars in the South, appears in candle charts. This pattern forms near the end of a downtrend and forecasts a bullish reversal.
Definition
Three stars in the south candlestick pattern consist of three bearish candles. It is a bullish reversal candlestick pattern. Each subsequent candlestick forms within the range of the previous candlestick.
The candlestick pattern shows that trading sentiment is bearish and some buying is taking place. The pattern shows that the momentum of sellers is decreasing, and the tide is slowly turning bullish.
The pattern has a very low probability of appearing on a candlestick chart. Traders can use it for trend analysis.
How to identify Three Stars in the South Pattern
The pattern occurs when the market is in a downtrend.
First Candle
The first candle is the long bearish candle of black, red, or any color representing bearishness. The candle has a long wick on the lower side and a small or no wick on the upper side.
Second Candle
The second candle is a shorter bearish candlestick and forms within the range of the first candlestick. Its closing is below the previous candle closing. Moreover, this candle has a small wick on the lower or upper side.
Third Candle
It is a small marubozu candlestick with a bearish body. It is shorter than the previous candlestick. In addition, its closing is below or at the same level as the second candlestick’s closing and forms within the second candle’s range.
Looking at the three stars in the southern pattern, we can see that a change in price direction is imminent as the downtrend worsens and the likelihood of a reversal increases. The bear market is gradually losing momentum with the appearance of each candlestick that makes up the pattern. A solid and consistent downward movement precedes this candlestick pattern. The downtrend loses strength with each new candlestick that forms into the pattern. As the candlesticks get shorter and shorter, the bear market loses momentum and strength on the downtrend.
Optimal Working Conditions for a Three-Stars in the South Pattern
We’ve filtered out the three confluences that increase your odds of winning with this trade setup.
Support Zone
If the three stars of the southern pattern form at support levels, there are plenty of possibilities for a bullish trend reversal.
Demand Zone
In this zone, the buyer waits for the price to enter the demand zone before the price fills the buy order.
Oversold Status
Forming a three-star pattern to the South in an oversold situation has a good chance of winning. Using the RSI indicator, you can check the oversold condition.
Trading Psychology Behind Three Stars in South
The psychology behind each candlestick pattern shows the activity of the traders behind the chart, and analyzing their behavior allows us to predict prices.
We know that bears and bulls are fighting for market control, and who wins will determine how the price will move. In the case of 3-stars in the south pattern, the first big bearish candle shows that bears are having a good time and are in control of the market. There is a sizeable drop in the price of an asset, and the price is in an oversold condition.
The second candle shows that bulls are bidding to allow the market to open above the first-day low, while the bears forced the market to close below the opening price. However, the bears failed to set new lows. All in all, sellers failed to continue the downtrend. Similarly, despite trying hard, buyers are not yet able to create new highs. Hence, there is a pause in the trend in the market.
Interestingly, the market opened higher on the third day than the previous day’s close, a renewed signal of bullish commitment. But the price fell again, falling below the previous day’s close. However, the bears failed to make new lows again, suggesting that the selling force is weakening.
With the bears exhausted, the willingness to buy is increasing day by day. This is reflected in the long shadow of the first day’s lower price, the higher next day’s opening price (compared to the previous day’s closing price), and the higher daily lows. Higher lows made the bears uneasy. The final day of the pattern also reflects market indecision with little price movement. Slight price movement forecasts the upcoming storm. However, as depicted by the small size of the third candle, the forces of buyers and sellers are equal in the market on the third day.
A confirmation on day four is needed to guarantee the bullish reversal of a downtrend. After the Three Stars in the South pattern completion, a new bullish candle stick will form, breaking the highs of the previous three candles.
Three Stars in the South Limitation
Due to the strict criteria, the pattern rarely appears on the charts. It has a low winning rate. The pattern has no profit target, so it isn’t easy to project take profit. Therefore, it is solely a trader’s decision on how to exit profitable trades.
How to Trade Three Stars in the Southern Pattern
Overall, to trade a pattern, you need to ensure that the market conditions are right and that the pattern is forming with intense support levels. For example, pulling back to the moving averages or trend line and forming a 3-star with a south pattern is a good setup for a long position in an uptrend market. Enter the close of the bullish candlestick and follow the pattern; place your stop loss below the low swing and your profit target just before the next level of resistance.
Conclusion
Three stars in the south candlestick pattern indicate the bullish reversal of a downtrend. However, a confirmation in the form of a bullish candlestick, a significant gap up, or a higher close is needed, showing the price is moving higher. If the price doesn’t drop, it shows a bearish continuation pattern rather than a bullish reversal. When the bullish reversal is confirmed, you can switch to the lower timeframe, and you should only apply your strategy in a bullish direction.
