Bulkowski's Three Stars in the South

Written and copyright © 2008-2011 by Thomas N. Bulkowski. All rights reserved.

In my book, Encyclopedia of Candlestick Charts, pictured on the right, I explore the entire range of candlestick patterns from abandoned babies to windows (not exactly A to Z, but you get the idea), in both bull and bear markets, using almost 5 million candle lines in the tests.

The book takes an in-depth look at 103 candlestick patterns and reports on behavior and rank (3 types: reversal rate, frequency, and overall performance), identification guidelines, performance statistics (tables of general statistics, height, and volume), trading tactics (tables of statistics on reversal rates and performance indicators), and wraps each chapter with a sample trade. I share a sliver of that information below. If you like what you read here, then you will love the book. Help support this website and buy a copy by clicking on the above link.

The three stars in the south name sounds like something visible from Australia only. But it is a candlestick pattern that acts as a bullish reversal and ranks first, yes, first for reversal performance. That means price reverses more often than any other candlestick I studied. Why? Probably because I found only 9 to study. Thus, anything I say on this web page is likely wrong. But here goes anyway...

Three Stars in the South: Important Results

Theoretical performance: Bullish reversal Tested performance: Bullish reversal 86% of the time Frequency rank: 99 Overall performance rank: 103 Best percentage meeting price target: 50% (bear market, up breakout) Best average move in 10 days: -3.64% (bull market, down breakout) Best 10-day performance rank: 23 (bull market, down breakout) All ranks are out of 103 candlestick patterns with the top performer ranking 1. "Best" means the highest rated of the four combinations of bull/bear market, up/down breakouts. The above numbers are based on hundreds of perfect trades. See the glossary for definitions.

Three Stars in the South

Three Stars in the South: Discussion

As I mentioned in the introduction, the statistics are based on just 9 samples. That is just 19,991 fewer than I like to see. The three stars in the south candlestick acts as a bullish reversal both in theory and in practice 86% of the time. That is the best reversal rate that I have seen among the 103 candle types. However, the overall performance rank which measures the move 10 days after the breakout under all market conditions and breakout directions, ranks dead last: 103rd. Thus, expect a reversal, but price to go almost nowhere after that! See the example below if you think I am kidding.

The best average move 10 days after the breakout is a drop of 3.64% in a bull market. That ranks 23rd. I consider moves of 6% or higher to be good ones, so this is almost half of what it should be.

Three Stars in the South: Identification Guidelines

Three Stars in the South: Example

I know. The picture shown here is far from the idea setup shown above, but with nine candle patterns to choose from, I am not complaining. This three stars in the south candlestick begins with a tall black candle in a downward price trend. It has a long lower shadow. The next day is a smaller version of the prior day only the candle forms a higher low price. That means the lower shadow bottoms above the prior shadow. The last day is a black marubozu, or a four price doji in this example.

The breakout from the three stars in the south candlestick is downward when price closes below the bottom of the candlestick pattern. In this example, the candlestick acts as a continuation pattern. Price entered the candle from the top and exits out the bottom, continuing the downward price trend.

-- Thomas Bulkowski

Copyright © 2008-2011 by Thomas N. Bulkowski. All rights reserved. Computer (n): A device designed to speed and automate errors.