Welcome to CryptoGod-1's blog on all things crypto. Today I will be continuing my series on Chart Patterns, which is an area all traders should ensure to familiarise themselves with. In this entry I will be focusing on Tri Star.
The Tri Star is a pattern consisting of three candles in a row, which is generally taken as a sign of a reversal in the existing trend, whether it be bullish or bearish. The pattern appears when three consecutive Doji candlesticks appear at the end of a prolonged trend, and the three Doji candles appear in a triangular formation. When the Tri Star pattern appears along a line of support or resistance, it is considered an ever stronger signal and give a greater chance of success in a trade.
How to Recognize a Tri Star
The Tri Star pattern form when three consecutive Doji candlesticks appear at the end of a prolonged trend. The first of these Doji's indicates that the indecision between the bulls and the bears has begun, but it still follows the existing trend.
The second Doji continues slightly in the direction of the prevailing trend, but once again shows the indecision and the inability of the prevailing trend to break out once again. The opening price is lower than that of the previous candle, and although the shadows / wicks may overlap, they are not of concern. Neither is the colour of the candles.
Finally, the third Doji changes the market sentiment and forms in the direction against the prevailing trend. It is formed higher than the previous candle, with the opening and closing price above that of the previous candle and therefore it is the beginning of the reversal.
The shadows on each Doji do not matter, but in general they are relatively shallow, which signals a temporary reduction in market volatility. An important factor with the Tri Star is that once the three Doji's have been formed, they need to be followed by a candle which breaks the previous set zones of resistance, otherwise the Tri Star may not result in a reversal in the existing trend.
The Types of Tri Star
There are two main types of Tri Star patterns, the bullish and the bearish Tri Stars.
Bullish Tri Star
The Bullish Tri Star is a three candle bullish reversal pattern. It forms when three Doji candles in a V-shaped pattern appear at the end of a bearish trend. There must be three candles to form the pattern, and the middle candle is where the distinctive push between the bulls and the bears appears. The momentum between both shows the clash between the bearish and bullish trends. The first and third candle are formed above the middle Doji, either side of it, which creates the unique and distinctive pattern. With the image below we can see that the bearish trend ended on the middle Doji, as it reached its lowest point, and on the third candle the reversal began. From there the resistance was broken and a Bullish Reversal took place.
Bearish Tri Star
The Bearish Tri Star is a three candle bearish reversal pattern. It forms when three Doji candles in a V-shaped pattern appear at the end of a bullish trend. There must be three candles to form the pattern, and the middle candle is where the distinctive push between the bulls and the bears appears. The momentum between both shows the clash between the bearish and bullish trends. The first and third candles are formed below the middle Doji, either side of it, which creates the unique and distinctive pattern. With the image below we can see that the bullish trend ended on the middle Doji, as the price hit its highest point in the trend before a bearish reversal began on the third Doji candle. From there the resistance was eventually broken and a downtrend began.
How to Trade Tri Star
The same theory applies when trading either the bullish or bearish Tri Star, albeit the trade types are in reverse. The key takeaways from the pattern must be present, being:
- Strong prevailing trend
- First Doji Candle
- Second Doji Below First
- Third Doji Above Second, creating V-Shape pattern
Once this pattern has formed, whether in a bullish or bearish formation, a trader should be looking to enter a trade. However, it is imperative that a trader must confirm the conditions using other indicators, such as momentum and volume. No trade should be made off of a candlestick pattern alone.
Ideally the Tri Star pattern would form near a significant support or resistance level, as this would increase the probability of a successful trade. These supports and resistances could be from a horizontal price level, key moving average, or a psychological round number. For example the middle Doji may touch off the 200 day moving average.
Bullish Tri Star
The Bullish Tri Star should be traded as follows:
- Once the third Doji has been formed and the pattern is confirmed via other indicators, a trade should be open where the third Doji ended. This would be considered an aggressive entry point as it does not wait for the trend to be confirmed via the next candle, but allows for a shorter distance to the stop loss point.
Stop Loss - A stop loss should be placed just below the middle Doji's lower shadow, as this would be the newest point of support which if broken, would confirm the Bullish Tri Star is incorrect. An aggressive trader could place the stop loss at the high of the third Doji, but the risk of the position being stopped by minor price movement is much greater.
- A profit target level is optional for all traders. Some will look for a large return of 5x their investment amount, while others will use targets such as previous levels of resistance or specific price points. Traders might also use a certain retracement of the trend that precedes the tri-star pattern to set level for taking profits, such as if prices retrace 10% of their previous move.
Bearish Tri Star
The Bearish Tri Star should be traded as follows:
- Once the third Doji has been formed and the pattern is confirmed via other indicators, a trade should be open where the third Doji ended. This would be considered an aggressive entry point as it does not wait for the trend to be confirmed via the next candle, but allows for a shorter distance to the stop loss point.
Stop Loss - A stop loss should be placed just above the middle Doji's upper shadow, as this would be the newest point of resistance which if broken, would confirm the Bearish Tri Star is incorrect. An aggressive trader could place the stop loss at the low of the third Doji, but the risk of the position being closed by minor price movement is much greater.
- A profit target level is optional for all traders. Some will look for a large return of 5x their investment amount, while others will use targets such as previous levels of support or specific price points. Traders might also use a certain retracement of the trend that precedes the tri-star pattern to set level for taking profits, such as if prices retrace 10% of their previous move.
Risks of Using Tri Star
The appearance of a single Doji is somewhat common in the markets which suggests to traders that there is indecision in the market. However, having a series of three Doji candles appear is extremely rare, and when discovered, the severe market indecision usually leads to a sharp reversal of the given trend. However, due to the rarity of the pattern many question its validity and accuracy.
It is important to note the position and existing trend in the market when looking at a Tri Star pattern, but the biggest risk to a trader is taking the pattern as gospel without looking at other technical indicators. Checking the volume, momentum, and general status of the market is a key component when looking at a Tri Star, as this will ensure that a trader does not fall for a fall pattern appearance.
Always make use of other indicators to confirm that the Tri Star pattern is correct in a trend reversal. For example, in the image below it is shown how the Tri Star pattern along with the RSI were used to ensure that the reversal was indeed correct.
The Tri Star patten is a rare but often accurate pattern which can appear in both bullish and bearish forms. It is best considered when it appears at the end of a prevailing trend, and most accurate when the reversal is backed up with other technical indicators. The pattern consists of three Doji candles which form in the shape of the letter V (or upside-down V for a Bearish Tri Star). The Doji candles show the indecision in the market, with the middle candle being the lowest/highest point in the existing trend and the third Doji showing the beginning of the reversal. They are rare to form but can appear in any timeframe when viewing a trading chart, therefore it is important to view multiple charts to get a clear indication of the pattern. If it is shown on a 15 minute chart, it would be wise to check the 1 hour or 4 hour charts to gain an overall better idea of the momentum and trends.
You can find the previous parts to the series here:
Chart Pattern - Part I - Understanding Candles
Chart Pattern - Part II - Doji
Chart Pattern - Part III - Marubozu
Chart Pattern - Part IV - Hammer / Hanging Man / Shooting Star
Chart Pattern - Part V - Spinning Top
Chart Pattern - Part VI - Engulfing
Chart Pattern - Part VII - Harmai
Chart Pattern - Part VIII - Morning / Evening Star
If you would like to check out the previous series I did, which focused on Technical Analysis, you can find it here: Recap of the Technical Analysis Series - Parts I - XXV
Have a great day.
CryptoGod-1.
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