The two crows Japanese candlestick pattern does not work in the stock market, and it occurs too infrequently in the forex and crypto markets to produce statistically significant results.
A trader can expect to lose $16.50 on average per $100 risked using a 1:5 risk-reward ratio optimized by profit per bar.
But what if I told you that you could turn this unprofitable pattern into a profitable one by doing the opposite of what everyone else is doing?
Keep reading if you want to learn how to slice through Japanese candlesticks like a samurai and trade the two crows candlestick pattern in a data-driven, profitable way.
What Is a Two Crows Pattern?
The two crows Japanese candlestick pattern is a three-bar pattern that supposedly signals a weakening uptrend and a possible bearish reversal. The pattern alerts traders to plan to exit any long positions or enter short as the uptrend is likely to weaken.
Traders who can identify the bearish two crows pattern and understand the underlying price action have an advantage over less informed traders. Regarding identification, let’s discuss how to identify this pattern in our candlestick charts.
How to Identify The Two Crows Candlestick Pattern
The two crows in the name refer to the two bearish candlesticks in the pattern. However, the pattern consists of another essential bullish candle. So, the two crows pattern contains three bars.
Here are the requirements for a valid two crows pattern:
- The trend must be bullish.
- The first candle in the pattern is a long bullish candle and reinforces the existing bullish price momentum.
- The second candle gaps up and is bearish.
- The third candle is bearish and opens within the second real body and closes within the first real body.
The prerequisite is that there must be an uptrend. During an uptrend, the price makes a series of higher highs and higher lows on a particular timeframe. You can also use moving averages to smooth price action to assist in determining uptrends.
The pattern is invalid if it forms during a sideways market or a downtrend. Additionally, the first bullish candle should be longer than the previous candles. Discretionary traders can use an indicator such as the average daily range to help identify longer bars.
Also, you need to mind the gaps.
If the second candle does not open with a gap, the signal is invalid. If the third candle fails to close the gap, the signal is invalid.
Also, there’s a reason why they say the trend is your friend. Changing an established trend takes a lot of effort for the market, and it may take multiple attempts to confirm a reversal.
For instance, if prices are in an established uptrend, a significant shift in market sentiment is required for a reversal. The reason for the change should be left for the media to speculate. It’s our job as a trader to be on the right side of the trend and understand what the market is trying to tell us.
And Japanese candlestick charting techniques provide a great way to do just that.
How to Trade the Two Crows Candlestick Pattern
The two crows candlestick pattern should be traded as a bullish continuation in the stock market using a 1:5 risk-reward ratio optimized by profit per bar. Traders should not rely on this pattern in the crypto or forex markets as there was insufficient data to determine a statistically significant optimal setup.
Let’s cover how traders typically trade this pattern, and then we’ll move on to how a data-driven, informed trader like you should trade it.
Two Crows Bearish Reversal Trade Setup
We can see a clear example of a two crows pattern in the Amazon daily chart on Oct. 14, 2020. Amazon’s closing price is above the 50-day moving average, which we’re using to determine the uptrend algorithmically.
The first candle is a long bullish candle that reinforces the strength of the bulls. The second candle gaps up and closes bearish. The third candle opens within the second candle’s body and closes with the first candle’s real body, which completes the pattern.
With the signal set, traders now wait for the entry.
Traders conventionally trade the two crows candle pattern by entering the markets with a sell position at the third candle’s low with a stop loss above the second candle’s high.
The day after the two crows candlestick pattern formation, we see price gaps below the previous day’s low, triggering a short entry. Price does retrace higher, but it never hits the stop loss and continues lower.
This is how traders traditionally trade the two crows candle pattern, and if you’re one of them, you’re likely losing money.
Now let’s learn how to trade this pattern profitably. Are you ready for your portfolio value to soar?
Two Crows Bullish Continuation Trade Setup
The Tesla daily chart from Jul. 08 2020 shows the two crows candlestick pattern back in action.
We see the upward momentum of the price as it rides above the 50-day simple moving average.
The first candle is a long green candle in the direction of the trend. The second gaps up and closes bearish with the third opening within the real body of the previous and closing within the first candle’s real body, completing the pattern.
Data-driven traders know this pattern is not a bearish reversal but most likely a short-term shakeout leading to a longer-term bullish move. These traders enter long at a break of the third candle’s high and set their stop at the low of the second candle.
So how much money did these savvy traders make?
Does the Two Crows Candlestick Pattern Work? (Backtest Results)
Using the following rules, I backtested the two crows candlestick pattern on the daily timeframe in the crypto, forex, and stock markets:
- A close above the 50-day SMA constitutes an uptrend.
- I tested risk-reward ranges from 1 to 5.
- The optimal risk-reward ratio is selected using profit per bar.
- I used the entry and exits as discussed above.
- Confirmation must occur within three days of the pattern signal.
The two crows pattern fails to deliver profits in the stock market and occurs too infrequently in the other markets to produce reliable results.
This isn’t surprising as most bearish reversal patterns do not succeed in the stock market.
Let’s see what happens if we reverse our signals, and we’ll:
- Go long instead of short.
- Enter at a break of the third candle’s high.
- Stop out at the low of the second candle.
We can see that trading this pattern in the stock market contra to a traditional trader nets us $21 on average per $100 risked.
The Bottom Line
The two crows candlestick pattern doesn’t work as advertised.
While misinformed traders think the two crows pattern identifies a shift in buyer’s momentum, more informed traders understand that this pattern is likely just a temporary pullback in the longer-term trend.
And while the two crows pattern does provide profits in the stock market when traded as a continuation, why not focus on only the most profitable candlestick patterns?