Are Three-Bar Patterns
Reliable For Stocks?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.
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
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.
What does the pattern look like? Here is my interpretation.
The pattern conforms to the following rules:
I limited my selection and
testing to daily prices,not
weekly or monthly prices.I
didn ít 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 ís a sample three-bar pattern.