What are the Three Stars in the South? Analyze the Candle Chart

Candlestick patterns are visual representations of price movements in financial markets, which give traders valuable knowledge. These candlesticks’ arrangement on price charts form patterns that can offer hints about market mood and predict possible future prices. 

This article discusses the importance of the three stars in the south candlestick pattern and how it can be used effectively as part of trading strategies.

Three stars in the south candlestick pattern

Three stars in the South candlestick pattern is a rare technical analysis formation that generally suggests a potential trend reversal. It should be noted that this pattern consists of three small real body candles and they are getting smaller each time indicating an uptrend termination.

Usually, the first candlestick has a small real body, followed by the second one whose real body is even smaller than the previous one while finally; the third candlestick has the smallest range. The third candlestick also often has a long upper shadow suggesting that during the trading session, there was significant selling pressure.

This pattern suggests that buying pressure is diminishing, and sellers may be gaining control in the market. It can be interpreted as a signal for traders to consider taking profits or even initiating short positions, anticipating a potential reversal in the price trend.

Now, let’s discuss how to trade three stars in the south pattern.

How do you trade the three stars in the south?

The Three Stars in the South candlestick pattern is a rare pattern that can indicate a bullish reversal trend. It’s formed by three black or red candles that decrease in size after a price decline. 

The first candle is a lengthy, bearish candlestick with a longer lower wick. The pattern reflects a slow decrease in the downtrend, with decreasing daily price ranges and consecutively higher lows.

You can make a trade as soon as the pattern verifies your presence, but the pattern can only serve as a trade trigger when other criteria for a good trade setup are present, such as:

• A favorable market structure: an uptrend or a range-bound market
• An important price level 

The three stars in the south candlestick pattern doesn’t typically precede large price moves. The price should ultimately move in the anticipated direction before taking a trade.

Three stars in the south trading psychology

Imagine a situation where a stock is steadily going down, and those who think it will keep dropping (the bears) are feeling pretty sure about it. The first candle in this pattern shows a big drop in the stock’s price, confirming what the bears think. The only tiny bit of hope for those who think the price will go up (the bulls) is that the candle ends higher than the lowest point of the day.

On the second candle, the stock starts a bit higher than the lowest point of the first candle but doesn’t drop even lower. However, it still ends lower than it started, which doesn’t make the bulls feel any better.

Then, on the third candle, the stock starts even higher, showing that the bulls are trying to push the price up. But once again, they don’t manage to keep the price from dropping. This time, though, the bears also fail to push the price to a new low. This suggests that the bears might be losing some of their selling power. 

The three candles make a kind of small triangle shape, which indicates that the bears might be getting tired of pushing the price down and that the bulls might have a chance to push it up a bit. But for that to happen, the price needs to go up after this pattern.

Three stars in the south example

In the Three Stars in the South candlestick pattern, there are three consecutive long-bodied candlesticks with decreasing closes.

Each candlestick opens within the real body of the prior candle and closes lower than the previous candle’s close. The pattern typically forms after a strong uptrend and suggests a potential reversal in the market sentiment.

For example:

• Day 1: A long green (or white) candlestick indicating a bullish movement with a high close.
• Day 2: A slightly smaller green candlestick with an open within the real body of the previous candle and a close lower than the previous day.
• Day 3: Another smaller green candlestick with an open within the real body of the previous candle and a close lower than the previous day.

This pattern indicates that buying pressure is weakening despite the market still closing higher than the open. It suggests a potential shift in sentiment from bullish to bearish, signaling caution to traders who may consider adjusting their positions accordingly.

Three stars in the south candlestick pattern limitations

The “Three Stars in the South” is a rare bullish reversal pattern that appears on candlestick charts. However, it has several limitations, so here are three stars in the south pattern limitations:

1. Rarity: The pattern is quite rare, which makes it challenging for traders to spot on charts.
2. Limited price moves: The pattern doesn’t typically precede large price moves. This means that even if a reversal occurs, the price change might not be significant, which could limit its effectiveness for trading purposes.
3. No profit objective: The pattern does not define a profit objective. Therefore, traders have to put in extra effort to find a profitable trade.
4. Need for confirmation: Traders commonly wait for a confirmation, such as a subsequent price increase, before acting upon this pattern. This means that the pattern alone might not be sufficient for making trading decisions, and additional indicators or patterns might be needed.
5. Potential for false signals: If the price drops following the pattern, it is not a bullish reversal, but rather a bearish continuation pattern.

Conclusion

In summary, knowing about candlestick patterns like Three Stars in South can help you make smarter choices in the stock market. Understanding these patterns and what they mean can improve your trading strategies and possibly boost your profits. To learn more, read blogs on StockGro. 

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