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