Three Stars in the South: Rare Bullish Pattern

Technical analysis and candlestick patterns go hand-in-hand. The Candlestick chart is one of the highly used chart patterns due to the simplicity and clarity of information it provides. A candlestick pattern communicates the open, high, low, and close price of the security. In addition, it is also depicted visually in a way that can tell you whether the closing price was above or below the opening price. This is shown by the colour scheme it follows. Typically, a green or white candle means that the closing price was higher than the opening price whereas a red or black candle means that the opening price was lower than the opening price.

The opening and closing price of the security is shown by a range, called the “real body”. The highs and lows by a long shadow-like structure or line called the wicks. While candlestick charts are a widely used concept, there are some rarely appearing patterns; three stars in the south is among them. In this article, you will know what is three stars in the south in detail.

Three stars in the south pattern

The three stars in the south pattern is among the rarely used pattern that indicates a bullish reversal pattern. It is formed after a downtrend and signals the start of the end of the bear market.

This pattern is formed by three black or red candles of decreasing size following a price decline. The pattern signals a bullish reversal. The formation of the three stars in the south pattern has four distinct requirements:

1. The overall sentiment of the market for the security is in a downtrend.
2. The first candle is a black or red candle with a long real body and a long lower wick with no upper wick.
3. The second candle is again a black body but with a lower real body and a higher low than the first candle’s low.
4. The last candle in the sequence is a black candle with a short body and no wicks. It is a Marabozu, the closing price of which is within the high-low range of the second candle.

These requirements are mandatory to identify the three stars in the south and are hence rare to locate. According to the logic behind the pattern, bears tend to gradually lose momentum as each of the candles in the sequence progress. The candles ultimately lead the bulls to take over and reverse the trend.

The three stars in the south candlestick pattern reflect a slow decrease in the downtrend. It is recognized by decreasing the daily price ranges and consecutively higher lows.

Psychology of three stars in the south

Assume a security rallying in a downtrend with momentum on the bear's side who are searching for lower prices. The first candle in the sequence confirms this with a significant price drop. The only ray of hope for bulls here is that it closed above the day’s low.

The second candle opens above the low of the first candle and does not succeed to create a new low for the security. The confidence of the bulls in the market are dropped further.

The third and last candle opens higher giving bulls a confidence boost. However, they fail to capitalize on the price declines yet. Bears again fail to record a new low, indicating the fading selling power of the bears. The three bars create a pennate pattern that signals bullish exhaustion while allowing bulls to gain momentum. However, the bull run can only begin if the price moves higher following the pattern.

How to trade the three stars in the south pattern?

For instance, XYZ security is witnessing an active downtrend, with bears looking to exploit the decreased prices. The first candle in the pattern appears with a huge price drop. The bulls do not particularly have a lot of confidence seeing the first candle as it closes below the low of the day.

The next candle shows that XYZ security opens above the low of the previous candle and doesn’t record a new low. The lower closing price than the open price reduces bullish confidence. The last candle of the pattern opens higher in an event of renewed bull commitment, however, they fail to take advantage of the price drop. Bears in the market, too, fail to record a new low again, weakening their position as sellers.

The three candles together form a small pennant pattern, indicating the loss of bear momentum and the rise of the bull rally. However, the bull rally is confirmed only if the prices start to go up following the pattern.

The confirmation levels are seen in the middle of the last red body. Confirmation is noted if the prices cross over this level. Ideally, the stop-loss level is determined as the lower of the last two lows. Following the long position, if prices decline instead of rising, and close or make consecutively two lows below the stop-loss level, while no bearish pattern is located, then the stop-loss gets triggered.

Limitations of three stars in the south

A candlestick however beneficial carries a few limitations with it. A few limitations of the three stars in the south pattern are:

• The pattern is quite rare and doesn’t tend to allow the prices to take huge moves following it, which makes it less likely usable for trading purposes.
• The pattern does not define a profit objective and therefore the traders have an extra effort to find a profitable trade.

Difference between three stars in the south and three black crows

Three black crows is also a bearish reversal pattern that forms following an advancement in the stock price The candles forming three black crows are three black candles facing downwards. The second and third candles open with the real body of the previous candle and end lower than they opened and below the last close.