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A Study in Technical Analysis : Candlestick Part 1 - One White Soldier


Decided to start a Technical Analysis series to analyze a few candlestick patterns and other tools to help me improve my stock and options trading. 

ONE WHITE SOLDIER


One White Soldier candlestick pattern is a Bullish Reversal Pattern used to predict the reversal of the current downtrend. The pattern consists of two consecutive long-bodied candlesticks - The first being a Bearish Candlestick followed by a Bullish Candlestick. This candlestick pattern rarely appears and if it does appear it's likely a strong indication of a reversal in trend (supported by other indicators as well).

The One White Soldier should have the following  characteristics.

 Bearish Candle followed by a Bullish Candle. 


If it is during a long downtrend, The Bearish Candle must be a new low in the downtrend(Counter Trend Trade).

 

1.  The Bullish Candle must open Above the Close of the Bearish Candle


Open2 Higher than Close1

 

2. Must make a higher low.


Low2 Higher than Low 1

 

3. The Bullish Candle must close above the high of the Bearish Candle.


Close2 Higher than High1

 








Once all 3 criteria are met, you have a One White Soldier candle pattern.


One White Soldier should appear :
1) At the Support of an Uptrend (Trend Trade)








One White Soldier can fail if the candle after the Bullish Candle is bearish and closes below the previous Bullish Candle.

Sample of Entry and Risk vs Reward


Here is a valid One White Soldier pattern (highlighted in green) but the third candle - it did not open above the high of the previous 2nd Candle. So Buy order wouldnt have been triggered if you placed it above the high of the previous Bullish Candle (second candle).




2)  At the Bottom of a Downtrend (Counter Trend Trade)






 


The Psychology Behind One White Soldier


When price is going down, there is a strong selling. Traders who were previously having long positions will start to panic and close positions. There may be a number of traders short-selling at this point hoping that the price will go lower.

After many days of selling, then next day the price opens above the close of the previous bearish candle  -- thus forming a Bullish Candle. This may cause a panic among short sellers that were hoping the price would continue going lower. They will start to lose money and may start to panic and close their short positions - by buying back the shares. This will create more buying pressure.
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