Weekly 3 Bar Pattern Strategy

The pattern of "Weekly 3 Bar" is a strategy that is ideal for position trading, and is usually effective on larger time frames, like the weekly chart.

Typically, this technique permits a trader to remain with the trend for a long time.

Traders can use a bar chart, or a candlestick with a DMI indicator setting of 10. The strategy is to identify the pullback in price in a current trend, that will either lead to a change in direction, or will turn out to be merely a retracement.

A generator like the RSI, slow stochastic, or MACD, will give traders information, but these generators have a basic disadvantage that defeats the purpose of the strategy. In a strong trending market, the generators stay oversold for a considerable amount of time - hence, this will give traders false signals.

In the long run, traders often now use the DMI indicators that provide traders with more accurate information in the change of momentum.

At the end of the current trend that is signaled by the DMI, after it reaches an oversold area, it begins turning from that point. This signals a change in price momentum, and traders would expect that prices would begin to move downward. This does not necessarily mean that a momentum will have a change in trend, altogether.

For this, traders must use price action to confirm. This is now the 3 bar pattern.

The techniques for exact parameters are as follows:

> Prices are in an uptrend with (+) DMI line just above the (-) DMI line. > The (+) DMI signal line surpasses the 45 reading, and begins retracing downward. > Traders can identify the highest high before the price bar, where the DMI is turned down. > Traders count back 3 bars from the highest bar. > Traders place their sell stop order just under the low from the third bar.

In some cases the order will not be filled, and the trader can look for a long entry to stay in the uptrend; on the contrary, if prices do not break on the low from the third bar this could mean a change in trend has occurred.

Another way to use this technique is to wait until the DMI has achieved the 45 level, and then traders can wait for pullback before entering on the break level of resistance, after the trend had fully resumed.