Have you heard of the 3 bar reversal pattern? If you're looking for a pure price action pattern that's a surefire way to make money, you're in the right place.
Patterns are comprised of candlesticks. Which are the bread and butter of trading. Not only do patterns and candlesticks, tell us a story, we use them for support and resistance. And those are the most important levels to find.
What Is a 3 Bar Reversal Pattern?
- A 3 bar reversal pattern can be either bullish or bearish. Like the name says, it's a reversal pattern. You can find it on all chart timeframes. If you're into day trading, you'll really like this pattern because you can find it everywhere.
1. Key Takeaways
- A 3 bar reversal pattern shows a turning point in the market
- Wait until candle 3 closes ABOVE 1 and 2 before you go long
- It is one of the safest patterns to play in the market
- This pattern will cut back on trading opportunities and prevent overtrading
- Be safe and use an indicator such as moving averages or RSI to confirm your entry
2. What Does the 3 Bar Reversal Pattern Look Like?
In a down-trending market, we are looking for 3 candlesticks to form in the following sequence:
- A bearish (red) candlestick
- The following candlestick closes BELOW the opening of the first candlestick. This candlestick will also be the lowest low of the 3 bar reversal pattern.
- The third candlestick closes ABOVE the high of candlestick 1 and 2
As you can see in the image above, there's nothing too fancy about this pattern, but it works. Regardless of the direction, up or down, the pattern still works.
And when identified and executed correctly, it has the potential to set you up for some decent trades.
When to Enter the 3 Bar Bullish Reversal Pattern
- The 3 bar reversal pattern is especially useful in lower time frames. Personally, I trade futures off the 5-minute chart and specifically trade this pattern. I do this because it cuts down on my trading opportunities and provides me with trade entry confirmation. In many cases, if you try to look for and trade too many setups, it leads to overwhelm and confusion. This way, I only look for, and trade one set up, and it works! Let's look at a real life example on the 5-minute MES! chart.
Long Set Up Entry
My confirmation to enter is a close of the third candlestick ABOVE the high of the first and second candlesticks. Requiring the close to take out the first two candlesticks would verify momentum and buying in the market. The reason I do this is to prevent me from being caught in a false breakout.
To make a long story short, a long set up entry looks like this:
- Bar 1 closes bearish (red)
- The low of bar 2 is below the low of bar 1, and bar 3
- Bar 3 closes ABOVE the highs of bar 1 and bar 2
- Buy at the close of bar 3
Alternatively, if you were a bit more aggressive, you could place a buy stop order at a close above the second candlestick.
Short Setup Entry
- Bar 1 closes bullish
- The high of Bar 2 is ABOVE Bar 1 and eventually Bar 3's highs
- Bar 3 closes bearish below the low of both Bar 1 and Bar 2
- Sell at the close of Bar 3
A Failed Example Of A 3-Bar Reversal Pattern
Take a look at the image below. One might think the reversal is coming with the doji on candle 2 but, candle 3 doesn't close above candle 1. Furthermore, it doesn't even close above the 50% line of candle 1.
For those eager price action traders looking to enter early on a reversal, they'd have to act quick. Otherwise, the market continues to wash down and the true reversal doesn't come until 90 minutes later. One of the indicators I use to confirm entry is the PSAR indicator and you can see the dots flipping at this 90 minute mark.
Be Smart And Use Confirmation Indicators
Before using the 3 bar reversal pattern, you should utilize indicators to confirm your entry. Some of my favorites are moving averages and momentum oscillators such as RSI to find high probability trade setups.
Because we wait for Bar 3 to close above Bar 1 and 2 before entering, Bar 3 tends to have a wider range. A wider range translates into a higher trade range. Because of to this, we have one of two options: Reduce our trade/lot size or tighten up our stop if at all possible. One final piece of advice, if you are unable to manage the risk, then skip the trade altogether.
The 3-Bar Reversal Pattern Summed Up
A 3 bar reversal pattern shows a turning point in the market. Compared to other reversal patterns out there, the three bars is one of the safer ones. Because it extends over three bars, using the third bar to confirm that the market has changed direction, its a safe pattern to trade.
Where To Go From Here
Trading stocks is complicated at best. And downright scary at worst.
With seemingly unlimited chat rooms and courses available and quality controls in place, some naturally turn to the cheapest provider. Seems like the only rational choice, right?
So what would a smart new trader do then? Go for the most expensive option? Sign up for a trade room that calls out trades?
Instead, watch out for those who promise results they can't deliver or worse yet, call out trades. Thankfully, Bullish Bears is committed to providing you with the best resources and training. You don’t need to spend thousands of dollars to do so. Join Bullish Bears to watch live how we read charts. Come learn to identify the trading approach that suits you best; perhaps it's the 3 bar reversal pattern!