V.18:1 (34-39): Are Three-Bar Patterns Reliable For Stocks? by Thomas Bulkowski

V.18:1 (34-39): Are Three-Bar Patterns Reliable For Stocks? by Thomas Bulkowski
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Are Three-Bar Patterns Reliable For Stocks?

by Thomas Bulkowski

Futures traders often use a three-bar swing low as a reversal pattern,but is the three-bar pattern reliable for stocks?Find out here.

I discovered this gem of a pattern while prospecting for ideas in a recent issue of STOCKS & COMMODITIES.In the interview with Kevin Haggerty was the following pattern description: One example [to determine a change in direction ]is a three-bar pattern,which is the same one that futures traders use.The stock establishes a low price as a swing point.Once the stock closes above the high of the low day,to me,that is a change of direction for an undetermined period. Using this description as a guide,I decided to formalize the shape and behavior of the pattern.

IDENTIFICATION RULES What does the pattern look like? Here is my interpretation. The pattern conforms to the following rules:
  • It uses daily prices,not intraday or weekly prices.
  • The middle day of the three-day pattern has the lowest low of the three days,with no ties allowed.
  • The last day must have a close above the prior day's high,with no ties allowed.
  • Each day must have a nonzero trading range.

  • I limited my selection and testing to daily prices,not weekly or monthly prices.I didn t use intraday pricing because the pattern description mentions closing prices.Although the paragraph describing the pattern says that a swing change occurs once prices close above the prior high,I interpreted that to mean the very next day,not several days in the future.It is,after all,a three-bar pattern,not a five-or six-bar pattern. Here s a sample three-bar pattern.

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