When it comes to intraday trading, there are quite a few technical indicators that are used by traders. Among the many indicators is the 3 bar reversal pattern, which is quite an easy indicator for beginners to understand and spot on a candlestick chart. While this is primarily used for intraday trading, it can also be adapted for short-term and ultra-short-term trades as well, to a certain extent. So, without further ado, let’s delve into the concept of the three-bar reversal pattern.
The three-bar reversal pattern – an overview
The 3 bar reversal pattern is a technical indicator that is used to identify trend reversal signals. The pattern involves 3 consecutive candlesticks, whose movement indicates whether a reversal in the trend is bound to happen or not. This pattern is used frequently by traders looking to execute trades against the trend.
How to use the three-bar reversal pattern?
It is always a good idea to first know when to enter into a trade after spotting the 3 bar reversal pattern. This is primarily because technical indicators are merely indicators of an impending price movement, and not confirmations. So, technical indicators may not always be fully accurate with respect to future price movements.
Here are some key points that you should note before entering into a trade based on the 3 bar reversal pattern.
- Firstly, look out for two consecutive bullish or bearish candles.
- Once you’ve spotted the three-bar reversal pattern as seen in the examples above, it is advisable to enter into a trade only if the third candle moves in the opposite direction and surpasses the second candle. For instance, in the event of a bullish trend, it is advisable to enter into a trade only if the third candle turns out to be a bearish candle and manages to surpass the second candle.
- Upon entering into a trade, it is advisable to exit well before the next reversal point.
The three-bar reversal pattern is a technical indicator that’s mainly used by traders for formulating counter-trend trading strategies. And since counter-trend trading strategies are considerably riskier than going with the flow, it is a good idea to ensure the confirmation of trend reversal before making a trade. Also, always remember to exit the position early to avoid getting stuck in a losing trade.