Candlestick patterns are essential tools in technical analysis, offering insights into potential market reversals and continuations. Among the less common but highly significant patterns is the “Three Stars North” candlestick pattern. In this article, we shall explore the meaning, psychology, formation, and trading strategies of the pattern.

Three Stars North Candlestick Pattern – Definition

The Three Stars North candlestick pattern is a three-candlestick pattern that generally indicates the potential end of an uptrend or a trend reversal. This pattern consists of three consecutive bullish candles(Green candles) along the previous uptrend with the second and third candles not going above the high price of the first candle. All three candles have little to no lower wick.

This pattern can appear in any trend but the bearish indication derived by the formation of this pattern will have a higher probability of succeeding if its forms after an uptrend.

Three Stars North Candlestick Pattern – Formation

The three stars north is a rare bearish candlestick pattern that indicates a reversal in the market. This pattern comprises the following three candles:

1. The first candle is a large-bodied green candle with a long upper wick and little to no lower wick.
2. The Second candle is a shorter green candle with its upper wick below the high of the prior candle
3. The Third candle is again a smaller green candle with little to no wicks and a close within the high and low range of the second candle.

The appearance of this pattern is rare, and it indicates a weakening strength of the buyers. However, the pattern does not necessarily indicate a downward movement. Rather it signifies an end of the existing uptrend.

Three Stars North Candlestick Pattern – Meaning

This three-candlestick pattern indicates a potential change in the market sentiment. The first long-bodied green candle shows that there is high buying pressure in the market as the price of the stock was in an uptrend. The second candle not being able to go above the high price of the first candle indicates that the price has a resistance.

The third candle also doesn’t close above the high price of the second candle indicating a decrease in buying pressure and a change in market sentiment. Based on the formation of this pattern traders can choose to enter a short position or look for exiting the existing long position if any.

Three Stars North Candlestick Pattern – Trading Ideas

Traders can choose to enter a short position only if this pattern is formed after an uptrend.  When the price of the security goes down and crosses below the third candle, it is a confirmation to enter a short position in the trade. A stop-loss should be placed above the high of the first candle

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Three Stars North Candlestick Pattern – Example

In the above 5-minute chart of IndusInd Bank Ltd., we can observe the formation of the three-star north candlestick pattern. Just as discussed in this article, the price of the stock saw the end of an uptrend and a bearish movement after the formation of this pattern.

At the time of the formation of this pattern, traders could have taken a short entry when the price of the stock started trading below Rs. 1425 and the stop loss was at Rs. 1430.

Three Stars North Candlestick Pattern – Limitations

While the Three Stars North candlestick pattern indicates a powerful reversal signal, it is not always accurate so traders should be aware of its limitations:

• The pattern’s effectiveness may vary depending on market conditions; it can be more reliable in trending markets than in range-bound markets.
• The pattern requires three consecutive sessions (or candles) to form, which may result in a delayed entry.

Conclusion

From the above learnings, it is clear that the Three Stars in the North candlestick pattern is an important technical tool to consider for analysing securities to build better strategies and spot valuable entry and stop loss levels.

Traders are always advised to use the Three Stars in the North candlestick pattern in conjunction with other technical analysis tools like indicators or chart patterns to limit the false signals generated.

Also, finding a proper entry with good risk management helps traders to be profitable in the long run.

Written by Deepak

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