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

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.