A combination of patterns, harmonious trade, indicator and candlestick analysis increases the efficiency of strategy development

A novice trader in their search of the Holy Grail would browse the entire Internet, enroll for courses, become an avid visitor of webinars, and download tons of books. In fact, all they need is to find one or several working models, carefully study them along with money management rules, adjust the filter system and start trading. If the experience turns out to be successful, you can use it all your life, if it doesn't - adopt a new strategy. Work on the pattern involves not only its detailed study, but also the creation of a set of rules that increase the efficiency of trade. We talked about them in the materials on 1-2-3 pattern, it's time to talk more about the Three Little Indians.  

 I was once a little surprised to see different names for seemingly identical graphic configurations. In harmonious trade, there are Three Movements, in candlestick analysis - Three Mountains and Three Rivers. A little later I realized that the identification of the model by different authors strengthens its analytical significance. If different people see the same patterns in the chart, the extrapolation principles will work. The question is how to make them effective.

Constructed on the basis of Japanese candlestick analysis' Three Mountains and Three Rivers, unlike the pattern created by Linda Raschke, Three Little Indians can be used as a kind of filter. For these graphic configurations, three consecutive extremes are not enough. It is required that at the top of the last high or low, a candlestick reversal pattern is formed. Whether it's a Hammer, a Hanged man, a Morning or Evening Star, Bullish or Bearish Engulfing, or another pattern.  

We cannot really say that there is no such thing in Western technical analysis. I, for example, am always happy to find a so-called "pattern in a pattern", which is when a derivative pattern appears in the parent graphic configuration. This is what happened around the formation of a large third Indian and is, in my opinion, a very serious signal for the reversal of the previous trend.

Despite the fact that Three Little Indians, as, indeed, the previously described 1-2-3, Expanding Wedge, and other patterns, represent the price action, i.e., trade without indicators, traders can very well use combined strategies. With this approach, the calculated indicators, whether MACD, Stochastic Oscillator, Relative Strength Index or others, serve as filters. They do not signal the opening of the position, they only allow you to sort out potentially profitable trades. As a rule, divergence - the discrepancy between the dynamics of the indicator and the instrument - is used. In the case of EUR/USD, the peaks of the currency pair chart are growing (resulting in the formation of the Three Little Indians), while the MACD highs, on the contrary, are declining. The discrepancy in their movement allows the trader to enter the market with more confidence.  

The pattern Three Movements is part of the harmonious trade system, therefore requires clear correlarions based on Fibonacci numbers. Rollbacks and projections should correspond to the levels 38.2%, 50%, 61.8%, 78.6%, 127.2% and 161.8% (or otherwise) to be considered a working model. Otherwise it should not be traded.

In my opinion, the market is not so harmonious so as to seek the target point (the point of formation of the next Indian) at the level of only 161.8% based on a correction of 61.8% from the previous wave. Thus, you could miss profitable trades. Another thing is to use combinations of significant numbers and ratios.

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Price chart of EURUSD in real time mode

Three Little Indians: varieties and filters

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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