3 Bar Reversal Pattern

How to Trade 3 Bar Reversal Pattern

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 we also use them for support and resistance. And those are the most important levels to find.

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 like this pattern because you can find it everywhere.

  • A 3-bar reversal pattern shows a turning point in the market
  • Wait until candle 3 closes ABOVE 1 and 2 before you go along
  • 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

Locating 3 Bar Reversal Pattern

In a down-trending market, we are looking for three candlesticks to form in the following sequence:

  1. A bearish (red) candlestick
  2. 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.
  3. 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 can potentially set you up for some decent trades. 

Entering a 3 Bar Bullish Reversal Pattern

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 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 setup, which works! Let’s look at a real-life example of the 5-minute MES! Chart. 

3 Bar Reversal Example

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 in the market. I do this to prevent me from being caught in a false breakout.   

To make a long story short, a long setup entry looks like this:

  1. Bar 1 closes bearish (red)
  2. The low of bar 2 is below the low of bar 1, and bar 3
  3. Bar 3 closes ABOVE the highs of bar 1 and bar 2
  4. 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. 

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Short Setup Entry

  1. Bar 1 closes bullish
  2. The high of Bar 2 is ABOVE Bar 1, and eventually, Bar 3’s highs
  3. Bar 3 closes bearish below the low of both Bar 1 and Bar 2
  4. 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’d have to act quickly. Otherwise, the market continues to wash down, and the reverse 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. 

3 Bar Reversal Chart

Using Confirmation Indicators

Before using the 3-bar reversal pattern, you should utilize indicators to confirm your entry. My favorites include 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 this, we have one of two options: Reduce our trade/lot size or tighten up our stop if possible. One final piece of advice: if you cannot manage the risk, skip the trade altogether.

Final Thoughts: 3-Bar Reversal Pattern

A 3 bar reversal pattern shows a turning point in the market. Compared to other reversal patterns out there, the three bars are one of the safer ones. Because it extends over three bars, using the third bar to confirm that the market has changed direction, it’s a safe pattern to trade.

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