Candlestick patterns, like the Three Line Strike, are the most straightforward strategies many incorporate into their trading plan. As long as you can identify the pattern when it forms on your technical analysis chart, then you can use it to determine future price movements.
This article will discuss what a Three Line Strike looks like and provide instructions on adding a thinkorswim indicator to quickly identify the pattern on a chart.
Three Line Strike Pattern
The Three Line Strike pattern consists of four candles that, when traded, can signal a sign of a reversal in the price action for a given stock or equity.
Before providing an example of the actual pattern, please be aware that the three-line strike consists of bullish and bearish bars that you need to identify on a chart. So, please ensure that you are familiar with a bullish vs. a bearish bar. Here is a small refresher below.
Bullish and Bearish Bars
A bullish bar can exist on any chart timeframe that supports Japanese candlesticks, the standard candlesticks used in stock trading. The bullish bar gets created when the close price of the specified candle is higher than the price the candle opened.
In this case, this means that the price moved higher as the candle formed. Many traders indicate a bullish bar as ‘green’ or ‘white’ as the price increases. See the bullish example above.
On the other hand, a bearish bar gets created when the candle’s close price is lower than where it opened. In this case, the price moved lower while the candle was forming. Usually, ‘red’ or ‘black’ candles on a chart are known as bearish candles.
Now, let’s jump to three-line strikes. We can identify three line strikes as either bullish or bearish.
Line Strike Candlestick Pattern
For a bullish Three Line Strike, look for three bearish candles indicating that the price is moving lower. After these three candles are formed, there should be one fourth candle (bullish candle) similar to or more than the size of the three bearish candles. This bullish candle essentially takes out or strikes out those three bearish candles. See the bullish three line strike below.
For a bearish Three Line Strike, look for three bullish candles indicating that the price is moving higher. After these three candles are formed, one fourth candle (bearish candle) should be similar to or more than the size of the three bullish candles. This bearish candle essentially takes out or strikes out those three bullish candles. See the bearish Three Line Strike below.
Here are some questions that you may have about the candlestick pattern?
- Can one of the three bullish or bearish candles be a Doji? It is recommended that the candles be all either bullish or bearish. Doji is neither bullish nor bearish.
- Does it matter about the size of the three candles? No, as long as all are either bearish or bullish.
- Can the three bearish or three bullish candles contain wicks? Wicks are fine as long as all three candles are either bearish or bullish.
- Are long wicks okay for the fourth candle that takes out the three candles? Long wicks are fine. However, you want to ensure that there is momentum and strength in the fourth to ensure that the price will move in your expected direction.
How to Trade the Three Line Strike
Now that we understand three line strikes, let’s see how to trade them as a reversal pattern.
For a bullish Three Line Strike, once the bullish bar closes, the trader would look to enter a long position anticipating that the upward momentum would continue. To offer additional trade confirmation, consider taking the bullish Three Line Strike when the market is uptrending and not downtrending.
Below is an example of a trade. Additionally, set your target as the next resistance level or specify a target percentage gain.
A great place to place the stop loss is at the low of the last bearish bar. See the stop-loss identified in the above example.
For a bearish pattern, once the bearish bar closes, the trader would look to enter a short position anticipating that the downward momentum would continue. To offer additional trade confirmation, look at taking the bearish three line strike when the market is downtrending.
Below is an example of a trade. Target the next support level for your take profit or specific percentage gain.
Like the bullish trade above, place the stop loss at the high of the last bullish bar. See the stop-loss identified in the above example.
Three Line Strike thinkorswim Indicator
From the examples, you can see how easy these patterns are to identify on a chart. However, finding them in real-time can seem overwhelming.
No need to worry, thinkorswim has a built-in candlestick pattern that can be added to any stock chart within their platform to ensure you do not miss a single Three Line Strike.
Here are some steps to add the pattern signal to your chart.
1. Open up thinkorswim. Navigate to the ‘Chart’ tab.
2. Select ‘Patterns’ on the top right and click ‘Select Pattern.’ See below.
3. From the ‘Select Patterns’ screen, on the Available Patterns section. Select ‘Candlestick.’
4. Type ‘ThreeLineStrike,’ and the indicator appears on the screen. Click that indicator to select it on the chart and click ‘Apply.’
5. The indicator should appear on your chart whenever the three line strike exists. You can always customize how the settings for the technical indicator appear on your chart. Here are the default settings.
Summary of the Three Line Strike Pattern
The three line strike can be one of the most helpful candlestick patterns when identified on a chart. The setup is available to both day and swing traders as it can occur on any chart timeframe. If you can find the pattern, you will likely enter a highly profitable trade.
Our day trading strategy does not look for three line strikes as these do not often occur throughout the day. Our system allows us to trade multiple times a day and takes advantage of minor moves in the market.
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