Three Stars in the South

What Is Three Stars in the South?

The three stars in the south is a very rare three-candle bullish reversal pattern that shows up on candlestick charts. It might show up after a decline, and it signals that the bearishness is blurring.

Grasping Three Stars in the South

The three stars in the south is a bullish reversal pattern with four qualities:

1. The market is in a downtrend.
2. The primary candle is black with a long real body, long lower shadow, and no upper shadow.
3. The subsequent candle is black with a shorter real body and a higher low than the main candle's low.
4. The third candle is black with a short real body, no shadows, and a close that is inside the high-low scope of the subsequent candle.

These severe requirements make the pattern rare. The theory behind the pattern is that bears are continuously losing momentum as every one of the three candles advances, which eventually drives the bulls to endeavor a rally to reverse the trend.

Most traders search for confirmation after the pattern. The confirmation, in this case, would be the price moving higher following the pattern, since that is what the pattern should show. In the event that the price drops following the pattern, it's anything but a bullish reversal, yet rather a bearish continuation pattern.

In practice, finding this pattern on charts is troublesome. The reversals can likewise be somewhat muffled, which means little upside for traders betting on a rally. The three stars in the south, as well as other candlestick patterns, don't have a profit objective. Accordingly, even assuming that they work, and the price rises following the pattern, in this case, there is no indication of how far it will rise.

Traders could utilize the pattern as a signal to exit a short position or to start a long position, albeit preferably entering on the confirmation bar — as the price begins to rise — is preferred. Furthermore, traders ought to search for confirmations in other chart patterns or technical indicators to support a reversal thesis.

In the event that, for instance, a stock is trending higher yet has as of late encountered a pullback, a trader could look for a three stars in the south pattern combined with a bullish stochastic crossover in oversold domain. At the point when combined, these bits of evidence make a seriously convincing trade thought, particularly in the event that the three stars in the south is followed by any bullish confirmation candles.

The difference between three stars in the south and three black crows is that the last option is a bearish reversal pattern coming after a price advance. The pattern is formed by three long black (down) candles, with the second and third candles opening inside the real body of the prior candle and closing lower than they opened and below the prior close.

Three Stars in the South Trading Psychology

Assume a security is taken part in an active downtrend, with certain bears searching at lower costs. The first candle in quite a while affirms this view with a sizable price drop. The bulls can draw slight positive thinking from this candle, which is that it closed over the low of the day.

On the subsequent candle, the security opens higher than the low of the main candle and fails to post a new low. The close lower than the open additionally diminishes bull confidence.

The security opens higher on the third candle in a demonstration of recharged bull commitment, however they fail to capitalize the price drops once more. Yet again bears fail to drop the security to a new low, demonstrating a reduction in selling power. The three bars form a small pennant pattern, demonstrating bearish fatigue while offering bulls a chance to begin a rally. The rally can start in the event that the price moves higher following the pattern.

Three Stars in the South Example

The pattern is rare, so models and trades are difficult to find with this pattern. The following pattern on a Toronto Dominion Bank (TD) daily chart is a slight variation of the three stars in the south in that the third candle has a small upper shadow. Preferably, it has no shadows. Likewise, the third candle makes a marginally higher high than the subsequent candle. Preferably, the third candle ought to be held inside the scope of the subsequent candle.

A trade could be entered when the price moves over the high of the three-bar pattern (or over the high of the second or third candle). A stop loss could be put below the low of the candle (or below the low of the second or third candle).

Three Stars in the South Limitations

• The pattern is extremely rare, and it likewise doesn't will generally create big moves following it, and that means it isn't especially valuable for the purpose of trading.
• The pattern doesn't have a profit objective; consequently, it ultimately depends on the trader to decide how they will exit a profitable trade.

Highlights

• This pattern is formed by three black or red (down) candles of decreasing size following a price decline.
• It demonstrates a bullish reversal, albeit the price ought to at last move in the expected heading before taking a trade.
• The three stars in the south candlestick pattern is an extremely rare pattern that doesn't regularly go before large price moves.