What is Three Stars in the South?

[Jane Goodwin]

[Justin Freeman]

The candle stick pattern, Three Starts in The South, is a rare and relatively reliable signal that price movement of an instrument is going to turn from bearish to bullish. It’s characterized by a particular candle stick pattern and whilst empirical data suggests the ensuing upwards momentum might not be long term in nature, the structure acts as a signal for putting on a long position, or possibly more likely, closing a short one. The Three Stars in the South pattern is relatively uncommon and the three candlesticks that denote it are shown below: The first thing to note is the pattern only works as a trading signal when it is preceded by a downwards market trend. The first candlestick of the pattern (candlestick number 1, above) will have a long real body, a long lower shadow and no upper shadow. During this time interval the opening price was also the high of the day. Candlestick number 2, MUST have: high price < high price of candle stick 1; low price < low price of candlestick 1; price range to be within the range recorded by candlestick 1. The combination of these factors means that candlestick 2 will have a shorter lower shadow than candlestick 1. Candle stick 3 is a Marubozu, meaning it has no upper or lower shadow. It must sit within the range of prices denoted by candlestick 2; and while its real body does not necessarily have to be encompassed by the real body of candlestick 2, if that is the case then it gives more strength to the argument that a reversal is about to occur. The three candles that make up the pattern are seeninfrequently. Over each time interval there are signs that the downward momentum is waning. Both candle stick 2 and candle stick 3 are encompassed by the previous day’s price range. Candlestick 2 and 3 also have opening prices that are higher than the previous close showing that some buyers are returning to the market. This buying action is ultimately overpowered by those selling but the bears are not having everything their own way. As previously mentioned, the signal is not particularly common. When developing your trading strategy it would be prudent to research the frequency and reliability of it when applied to the specific instrument you are looking to trade. A generic trading strategy would involve taking a long position with a stop-loss just below the low of candle stick 1. Your entry point might be one that waits for the secondary confirmation of price moving above the mid-point of candlestick 3. Also consider trading volumes as an increase in those followed by a white candle would signify the bears had really run out of steam. Given that this might be a form of retracement trading it might be prudent to take profits or at least minimize losses. Bringing stop-loss up to break even or applying a trailing stop-loss might mean you at least make some money out of trading the signal.

[Emilio Estavez]

Hi Jane,

The Three Stars in the South refers to a bullish reversal pattern that’s made of three consecutive black candlesticks which have successively lower closes and higher lows in a steadily declining downtrend. 

There are a few things to keep in mind when identifying the pattern:

-The market should be in a downtrend

-The first candlestick is a black candlestick that has no upper shadow and a long lower shadow which appears on the first day.

-.On the second day, another black candlestick should close under the close from a day before and have an opening within the first day’s body. Also, it has a higher low. 

4. On the last day, a small Marubozu appears with a higher low.
 

[James]

Hello Jane,

Formed near the edge of a downtrend, this bullish display presents three candlesticks. The first bar has an extended lower shadow in addition to its long black body. The second bar features a black body that starts below the former opening and ends at or below the previous closing.




The last bar is black like the others only that it’s a marubozu. This means it doesn’t have wicks. Ordinarily, a marubozu candle implies a session started at the highest and ended at the lowest daily values. Note that the candles decrease in size as the trend continues to show a weakening bearish momentum. This is not only visible in the reducing daily ranges but also the successively higher lows. 
The fact that each candle swallows the subsequent one signals a bullish invasion. To ascertain the bullish control, however, wait for prices to exceed the last candlestick’s midpoint. This pattern is rare despite being accurate in predicting bullish swings.