Peculiarities of trading in a popular pattern

Regardless of whether you’re holding a position or analysing the market in order to open a position, it’s important to know where the support and resistance levels are. There exist a lot of methods for identifying them, including the line approach, Fibonacci levels, market indications, and so on. The “Three bars” pattern is one of the simplest ways to identify important levels. Combining it with some indicators, you can build an independent trading strategy. Joseph Stowell, a manager with over 20 year’s experience, is considered to be the author of the “Three bars” method. He taught trading in colleges and universities of New York for 30 years. 

If a new maximum takes place in the bullish market, the bar that contains it is numbered as №1. The bar whose minimum is lower than the minimum of the bar №1 is marked as №2. The bar №3 is identified in the same way. Thus, the line of 3 bars is plotted.  It’s the support line. As long as the quotes are above it, the bulls control a currency pair. It’s worth mentioning that bars №№1-3 don’t have to be a sequence. They may include other bars in between. The main condition is correctly located minimums. 

If the formation of a new peak in a Forex chart is accompanied with an extremal value of one of the ADX lines, there’s an opportunity to form a position at the breakout of the “three bars” line. For example, there was a combination of three bars with growing minimums in the bullish market and an extremal value of +DMI in the H1 chart of AUD/JPY.

Three bars pattern in AUD/JPY chart            

  

A successful assault on the three bars line serving as a support level is a reason for opening a short position. A protective stop-loss order should be placed at the maximum of the price fluctuation. In case of AUD/JPY, a trader had a chance to sell the Australian dollar again a few days later.   Visually, it reminds of a retest of the previous support level that has served as resistance since late February. 

Three bars strategy in  AUD/JPY chart

The same applies to the bearish trend. If a new minimum takes place, it’s numbered as №1.

 Bar №2 is a bar with a higher maximum. Then, bar №3 is identified and the three bars line is plotted. In this case, the line acts as resistance, and the situation is controlled by sellers until resistance is broken. A new extremum of the –DMI line of ADX is a condition for opening a long position. 

Three bars pattern in USD/CHF chart

A long position can be opened at the moment of breakout or at a closing price of the breakout bar if it’s located above the three bars line.A protective stop-loss order should be placed below the minimum of the current price accumulation (below bar №1). The trade should be closed using a pre-set profit factor. 

Three bars strategy in USD/CHF chart

Other tools of technical analysis, including Fibonacci levels or VSA, may serve as confirming signals or filters which allow boosting the efficiency of the trading strategy. Particularly, in the example of AUD/JPY, the formation of a maximum under falling volumes points to the bulls’ weakness.  In the H1 chart of USD/CHF, on the contrary, it was worth paying attention to increasing volumes which allowed finding a big buyer’s traces.   

On the whole, the “three bars” pattern is quite a simple instrument for identifying important control levels. Before it’s broken, we can easily understand which party dictates to the market.  


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Price chart of AUDJPY in real time mode

Three bars breaking a trend

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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