DEFINITION of 'Three Stars in the South'

The three stars in the south is a three-candle bullish reversal pattern that appears on candlestick charts.

BREAKING DOWN 'Three Stars in the South'

The three stars in the south is a bullish reversal pattern, where:

  1. The market is in a downtrend;
  2. The first candle is black with a long real body, long lower shadow, and no upper shadow;
  3. The second candle is black with a shorter real body and a higher low than the first candle’s low;
  4. And, the third candle is black with a short real body and no shadows and a close that’s within the hi-lo range of the second candle.

The theory behind the pattern is that bears are gradually losing momentum as time progresses, which eventually leads the bulls to attempt a rally to reverse the trend.

The three stars in the south pattern is very reliable in terms of predicting a reversal, but in practice, it is very difficult to find in candlestick charts. The reversals also tend to be relatively muted, which translates to little upside for traders betting on a decline.

Traders should use the pattern as a signal to exit any short position, but initiating a long position may provide little upside. In addition, traders should look for confirmations in other chart patterns or technical indicators to support a reversal thesis.

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