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, but they also help us identify support and resistance levels. 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. As the name says, it’s a reversal pattern. You can find it on all chart timeframes. If you’re into day trading, you’ll appreciate this pattern because it’s prevalent throughout the market.
- A 3-bar reversal pattern shows a turning point in the market.
- Wait until candle three closes above candles 1 and 2 before going 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.
How to Locate a 3-Bar Reversal Pattern
In a downtrending market, we are looking for three 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 candlesticks 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 can potentially set you up for some decent trades.
3 Bar Bullish Reversal Pattern Trading Strategy
The 3 bar reversal pattern is especially useful in lower time frames. I trade futures off the 5-minute chart and specifically trade this pattern. I do this because it reduces my trading opportunities and provides me with trade entry confirmation. In many cases, trying to look for and trade too many setups can lead to overwhelm and confusion. This way, I only look for and trade one setup, which works! Let’s look at a real-life example of 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 buy into the market. I do this to prevent myself from being caught in a false breakout.
To make a long story short, a long setup 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 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.
Failed Example of a 3-Bar Reversal Pattern
Take a look at the image below. One might think the reversal comes with the doji on candle two, but candle three 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 must act quickly. Otherwise, the market continues to decline, and the reversal doesn’t occur 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.
Final Thoughts on 3 Bar Reversal Pattern
A 3 bar reversal pattern shows a turning point in the market. Compared to other reversal patterns, the three bars are one of the safer ones. Because it spans three bars, utilizing the third bar to confirm a market change in direction, it’s a safe pattern to trade. Please be sure to use proper risk management techniques when trading a 3 bar reversal pattern.
