The Weekly 3 bar Pattern is a strategy which is ideal for position trading and is very effective on larger time frames, like the daily or the weekly chart.

Basically this technique allows a trader to stay with the trend for a longer period of time.

You can use a candlestick or bar charts along with the DMI indicator with a setting of 10. But I prefer the candlestick charts since reversal patterns are easier to spot on this.

Our strategy is to determine if the pullback of price in an ongoing trend will lead to a change in trend direction or will turn out to be just a retracement. Hence we choose an indicator which tells us when price is in the overbought/oversold area.

Any oscillators like the slow stochastic, RSI or MACD will give us this information but these oscillators have a basic drawback which defeats the very purpose of our strategy.

In a strongly trending market the oscillators remain overbought/oversold for an extended period of time, thus giving false signals. So we use the DMI indicator, which gives more accurate information on a change of momentum.

We will look at the technique for a short setup and simply reverse the rules for a long setup. The basic function of the DMI indicator is to confirmed a trend when the (+) DMI line has crossed the (–) DMI line (in case of the uptrend). The end of the current trend is signaled by the DMI when it reaches an overbought/oversold area and starts turning from there. This indicates a change in momentum of price, and we would expect price to start moving to the downside. But the change in momentum does not necessarily mean a change in trend. It could also mean that price is catching its breath to resume the main trend. (A reading of 45 on the DMI is considered overbought and we will use this setting to define the change in the DMI.) So we use price action for a confirmation, which brings us to the 3 bar pattern. We look for the highest high in an uptrend when the DMI reading is +45 and starts retracing down. It would probably be the bar where the DMI is at its peak. We then count back 3 bars from this the bar which has made the highest high (including the highest high bar) and we place our sell stop orders beneath the low of this third bar. We can define the exact parameters of our setup for this technique as-

• Price is in an uptrend, with the (+) DMI line above the (-) DMI line.
• The (+) DMI line exceeds the 45 reading and starts retracing down.
• We identify the highest high at or before the price bar where the DMI turned down.
• We count back 3 bars from this highest high bar (including the highest high bar.)
• We place our sell stop order beneath the low of this third bar.

As we can see in situation one, we place our sell stop below the low of the third bar but price does not come down to it. This is a strong sign of the continuing uptrend and we can resume a long position on a break of the most recent high before the pullback.

In situation two, the price did break the line after pausing for some time. This signaled a change in trend, which was also confirmed by the (+) DMI line crossing the (-) DMI line to the downside.

Another way to trade this technique is to wait for the DMI to reach the 45 level, wait for the pullback and enter on the break resistance level (previous highest high of the 3 bars) once the trend resumes. This can be useful when the DMI becomes overbought /oversold as there is often a period of consolidation. These types of patterns occur frequently on weekly charts and can give good trading opportunities.

Good Trading
Mark McRae

The Cycle Of A Trend

In this lesson we are going to look at the different stages of a trend and how it can help you position yourself for a trade.

It is commonly accepted that there are four stages of a trend. These stages make up a cycle and each cycle has smaller cycles contained within them.

It doesn't matter whether you like to trade with 5-minute charts or monthly charts. Each market will be in some stage of the cycle as you are observing it.

Before you even think about getting into a trade you should have some idea of where the market is in the cycle.

This will help you avoid making the wrong entry.

For example, if you have identified stage two of the cycle it doesn't make sense for you to be short in an up stage.

If you look at the chart below you can see the 4 different stages clearly marked.

Stage One

The start of the cycle (stage one) is where there is very little happening and the market is generally flat. At this stage the market is normally oscillating in a certain range. As this stage ends you often see a breakout of the previous range. The breakout can often be explosive particularly if it has been in consolidation for a long period of time. For markets that can measure volume an increase of volume is an early indication that the breakout is real.

Stage Two

Stage two is after the breakout has occurred and we begin to head North. Depending on the force of the move the market may rally and not come back to the breakout point or it may come back and test that area.

In the chart example the market broke out of the range and then rallied to R1 where it began to retreat to S1. These two points are very important. If S1 were lower than the breakout point or S1 were to rally slight but still remain below R1 then break back down past S1 then the start of the cycle would be in doubt.

What actually happened was that the market came down to S1 and then rallied past R1. The aggressive trader would already have taken a position on the breakout and most likely add to the position as R1 was taken. If you had not entered the market yet then this would be an ideal opportunity to jump in.

The second point to note is that the moving average began to turn up after the breakout giving further support to the beginning of the cycle.

In the case of the chart example I have selected a simple 40 period moving average of the closes. You can use any moving average that suits the time frame you are dealing in.

Stage two continues making higher peaks and higher valleys and may come back to test the moving average a few times.

Stage Three

Stage three is the final thrust of the cycle. You may notice a spike or a double top formation as the trend begins to run out of steam.

In our example the top is fairly flat. R2 is formed and the market retreats to S2. What happens next is the opposite of the start of the cycle. The market stops at S2 and then rallies slightly. The fact that the rally did not exceed R2 is what is significant. Instead the market only reached R3.

As soon as the market broke through S2 it signified the end of the trend. You would also note that the moving average turned down at this point further give support to the end of the up move. If the top was not easily identifiable and positions closed at that time then once S2 was taken any long positions would have been closed.

Stage Four This is the final stage of the cycle and perhaps the most interesting. Depending on market conditions some traders may now go short. A potential shorting point would have been on the break of S2. The market in our example is making lower valleys and lower peaks. This tells us that there is now a move to the downside.

Before initiating a short on the break of S2 you could measure the start of the whole move at the beginning of the cycle to where the market topped at stage three. You could then calculate the 61.8% retracement (see lesson on Fibonacci).

This would give you a downside target to aim for and if there was enough meat left in the trade initiate a short trade. Stage four can be difficult as the market may either go into consolidation again or continue down.

So how can this help your trading? Well, the first thing to do before you enter a trade is decide where in the cycle you are. If you are at stage two then it could be dangerous to go short. It could also be dangerous to enter short if stage two had been building for a long time. Remember the market can't go up for ever.

On the other hand if we were entering stage four you wouldn't want to be long. Just by identifying the different stages of the market it can help you lock in profits, make better judgments decisions on whether you should be in the market at all and perhaps give you clues for entry and exits.

Good Trading
Mark McRae