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Since the introduction of chart patterns, trading has become much more manageable. These charts are a component of technical analysis. When you use them with fundamental analysis, such as reviewing a company’s profit and loss, the chance of capital risk is reduced to some extent.
One of the charts that investors widely prefer is the Upside Gap Two Crows. But what do they mean, how are they interpreted, and what strategies can you use to complement them? We will discuss all of that here.
What is the Upside Gap Two Crows Candlestick Pattern?
The term ‘Upside Gap Two Crows’ is a bearish reversal candlestick pattern you might spot during an uptrend in a price chart. It warns that the current upward momentum could be losing steam, and the market can face a downward turn in the near term.
Here is the formation of upside gap two crows candlestick pattern:
- On the first day, you will see a large bullish candle that continues the uptrend. This candle can be white or green. It shows that the closing price was significantly higher than the opening price.
- The next day, the stock opens at a higher price, creating a gap from the previous day’s close. However, the candle for this day is bearish. That means the closing price is below the opening price, usually black or red.
- The pattern gets its name from the third day. The stock opens even higher than the second day, but it closes below the second day’s close by the end of the day, forming a larger bearish candle. This last candle engulfs the second day’s candle, completing the “Two Crows” formation.
Interpreting Upside Gap Two Crows Candlestick Pattern
- Ensure that the pattern appears during a clear uptrend. The presence of this pattern in a downtrend does not hold the same significance.
- Look for a large bullish candle that continues the uptrend. This candle indicates strong buying pressure and is typically white or green.
- Notice a gap from the first candle, followed by a bearish candle. Despite opening higher, this candle closes below its open, signalling a loss in bullish momentum.
- Observe a second bearish candle that opens above the second candle’s open but closes below its close. This candle should engulf the second candle and is a critical indicator of a potential reversal.
- Pay attention to the trading volume. An increase in volume during the formation of this pattern may confirm the bearish reversal signal.
- Wait for additional confirmation before making trading decisions. A drop below the low of the third candle can serve as a confirmation of the trend reversal.
- Always consider the broader market context. The pattern might represent a temporary pause rather than a complete reversal in a strong uptrend.
Strategies to use with Upside Gap Two Crows
You can use any of these strategies.
- Moving Averages: This pattern, indicating a potential trend reversal, becomes more reliable when confirmed by the Moving Average. If the pattern forms below a key Moving Average, like the 50-day or 200-day, and the price subsequently breaks below the third candle’s low, it suggests a stronger bearish shift, validating the pattern’s predictive power for a downward move.
- Fibonacci Retracement: Fibonacci retracement levels indicate where support and resistance are expected to develop based on the percentage of a prior price move retraced. Draw Fibonacci retracement lines between relevant high and low points. If the Upside Gap Two Crows forms and the price drops below the low of the third candle, it confirms the reversal signal.
- RSI (Relative Strength Index): Check the RSI for overbought signals. An RSI reading above 70 alongside the Upside Gap Two Crows could indicate that the market is due for a correction.
- Stochastic Oscillator: Watch for the Stochastic lines to cross in an overbought area (above 80). This indicates a potential price reversal. Suppose this occurs alongside the Upside Gap Two Crows.
- Bollinger Bands: Monitor Bollinger Bands for price volatility. A pattern forming near the upper band could suggest an overbought condition, supporting the reversal prediction.
Upside Gap Two Crows vs Three Black Crows Pattern
By now, you must be clear on how the upside-gap two-crow pattern works. But to help you better understand how it differs from the black crow pattern, here is a tabular presentation.
| Pattern | Upside Gap Two Crows | Three Black Crows |
| Definition | A three-candle pattern warns a slowing of momentum in an upward trend, which could forewarn of a reversal lower. | A bearish candlestick pattern predicts the reversal of an uptrend. It consists of three consecutive long-bodied bearish candles. |
| Formation | Bullish Candle: A large bullish candle (white or green) continuing the uptrend. Gap Up Bearish Candle: A bearish candle that gaps up from the prior candle, closing below the open. Engulfing Bearish Candle: A second | Three consecutive long-bodied bearish candles open near the previous day’s close and close near their low. |
| Confirmation | There are traders who prefer to receive “confirmation” before making any moves. This means waiting for the price to fall below the low of the third candle before shorting or selling. | It is best used with other technical indicators or chart patterns for confirmation. Volume during the preceding uptrend and the three-day black crow pattern can enhance accuracy. |
| Interpretation | This indicates that security might be transitioning from an upward trend to a descending trend. The bulls’ inability to maintain upward momentum suggests a shift from bullish to bearish sentiment. | Indicates a strong shift in market sentiment from bullish to bearish. The sustained downward pressure over three sessions suggests the start of a bearish downtrend. |
Conclusion
The Upside Gap Two Crows Candlestick Pattern serves as a crucial indicator of potential trend reversals in stock trading. Understanding its formation and interpreting its implications allows you to make informed decisions to manage risk and capitalise on market opportunities. However, you must implement complementary strategies to confirm signals and enhance the pattern’s reliability. To learn more, subscribe to StockGro.
FAQs
The Upside Gap Two Crows refers to a three-candle bearish reversal pattern. It occurs during an uptrend. This pattern points out a possible trend reversal from bullish to bearish.
No, a reversal is not guaranteed. After the pattern, the price could move sideways or rally. Some traders await confirmation before acting.
To confirm signals, you may employ strategies such as Moving Averages, Fibonacci Retracement, MACD, RSI, the Head-and-Shoulders Pattern, the Stochastic Oscillator, and Bollinger Bands.
While both signal potential reversals in uptrends, the Upside Gap Two Crows consists of a bullish candle, a gap-up bearish candle, and a larger bearish engulfing candle. On the other hand, the Three Black Crows pattern comprises three consecutive long-bodied bearish candles.
Look for three consecutive candles: a large bullish one followed by a bearish candle that opens higher, and finally a larger bearish candle that engulfs the second candle, forming the “Two Crows” pattern.
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