The 3 Bar Play is the natural progression of the strategies we have discussed recently with regard to the open market. It is a great addition to the 1 minute ORB and the other opening range opening strategies I discuss in the blog. Not only that, but it’s a popular strategy used by many day traders like Jared Wesley of LiveTraders, Oliver Velez of iFundTraders or Sami Abusaad of T3Live.
Today we will discuss the rules and criteria for detecting this pattern, along with the context you need for a successful trade. It can be a powerful strategy for managing risk during open market volatility and can lead to really nice gains.
But before you dive in, check out this quick tutorial we’ve put together on how to practice this great strategy:
Rules of the game of 3 bars
First, you may be wondering why we have shown some previous examples with 4 bars instead of just 3. Technically, the pattern can have any. Sometimes you can have 5 bars as long as they are tactical and constructive.
Yes, you would say 4 Bar Play if it has 4 bars. But for all intents and purposes, this strategy is known as a 3-bar or 3-bar strategy.
What needs to be kept in mind with this strategy is that the back bars, be they 1 or 2 of them, should be few and should be adjusted.
To that end, let’s look at the three main rules for identifying a 3-bar game.
- The first bar should be a lighted bar: a very wide range candle, ideally with a high volume.
- The backslash or bar 2 (& 3) should not exceed 50% of the backslash of the first bar and have relatively equal maxima.
- The trigger bar (or expansion candle) should also be a good marubozu candle up to new highs or lows.
The entrance is made at the break of the smaller “inner candles” with a stop below them.
Here’s what it can look like for both long and short entries:
Note that this gives traders a definable risk about halfway through the first light bar, or “elephant bar,” as Velez calls them. As a follow-up game, you want to play in the main direction of the gap or premarket trend.
Let’s look at a handful of examples to create context for this strategy.
Long examples of 3 game bars
As discussed above, the best scenario for these configurations is as a continuation pattern. That is, if the stocks are expanding, ideally you want a continuation above the resistance from a daily or premarket level. A combination of both scenarios would be even better.
To this end, let’s look at this example of PBTS.
This morning, the shares were occurring remarkably in the market with a good consolidation in the open. In the open air, stocks increase in the first 2-minute candle. It consolidates into a bar and then continues in the direction of the gap.
The second candle of the pattern was an orderly delay in lowering the volume. The ideal would be to set the entrance just above this candle and the first candle. The break provided a good 16% gain over our entry in about 15 minutes.
Long Example # 2: TSLA
In this example, we use the 1 minute chart to find our 3-bar game. Before we do that, it’s important to note that Tesla exploded from a consolidation of the daily chart, which gave us the impetus to get long in this 3-bar game.
First look at the daily chart with the resistance line drawn:
Taking advantage of the premarket now and opening the doorbell, we see that this line was also a key level in the premarket. The importance here is that if this line is broken, we have nothing but “green pastures” on top.
As we do in the other examples, we get a light bar that moves up and through the resistance, a slight pause and then a continuation.
Keep in mind that the “pause” candle can be red or green, it really doesn’t matter. The important thing is not to follow the first candle too much and form near the top of that candle.
In this example with TSLA, we had a good chance of earning almost $ 10 in no time. Fantastic odds!
3 Short example of play bar
The best thing about the 3-bar strategy is that it can be played in any direction. Just as you can search for actions that are separating and / or exploding in a daily period of time, the same can be applied to actions that are broken down.
To that end, let’s take a look at this example of OCGN.
Note that the daily chart here shows a nice gap thanks to the previous support. This sets the tone for us in the premarket.
The best thing about this strategy is that it is easy to scan gaps in the morning. All we have to do is analyze the longer time periods for a good continuation move once the market is open.
In this sense, let’s look at the premarket and open this day in particular with OCGN:
In this 2-minute chart, OCGN opened premarket support at $ 7.50 very easily. We paused quickly and then resumed it with a beautiful firing candle. This resulted in a quick gain of $ 1.25. Not bad for 15 minutes of work.
How to manage a 3-bar play position
At this point, you may be wondering how to manage a position when you change this strategy. There are a few things to keep in mind for this.
If you’re a beginner who still explores and educates about action on volume and price, you may want to set goals and stops quickly and quickly.
We discuss this in other posts, but here are a handful of approaches you can take.
Get benefits with specific R values
R-values are basically the calculation of risk / reward. Let’s use the OCGN example above and say you entered short at $ 7.22. If you use the $ 7.44 area as the stop shown on the chart, that means you will risk $ 0.22 for the trade.
To calculate the reward, you may think that a 2R or a 3R or a 4R is acceptable. If this is the case, simplify the risk, double or triple.
For this example, a 3R operation would be $ 3 x $ 0.22 = $ 0.66. This means that, from your entry, you want to make a profit of between $ 7.22 and $ 0.66 = $ 6.56.
So you would have placed an order for profit and cover at $ 6.56, which would have been towards the bottom of the second long-body red candle on the chart after your entry. This is what it would look like:
In other words, your trade was from one unit of risk to 3 units of reward. And if that fits your personality, go for it. Of course, it’s a bit of an “all or nothing” type of strategy and you may stop doing it if your goal is not achieved and the actions are reversed. But that’s the name of the game.
Over time, you may want to adjust your rules for benefits to include later stops..
Now, you may be thinking, “But look how much meat we have left in this trade!”
Let’s see how a higher time period can help you get more profits from this trade.
Higher time frame support and resistance
Going back to OCGN’s daily chart, we can clearly see that it “fills the gap” from day to day and has potential support at this $ 6 level. As traders, we can use these levels to set potential goals.
Often, actions do not usually find support at daily levels. That $ 6 level, which is also a “whole dollar” psychological level, did exactly that for OCGN. It matched the last tall candle before the gap, as noted in the chart.
Knowing this, the shrewd trader could have set it as a target regardless of the R value. Or, he could have taken a partial at the 3R level at $ 6.56 and then taken the rest at that key level. It proved to be the bottom line for OCGN that day before stepping back.
Even the most advanced traders could have added to their position in the first setback as stocks continued to fall.
Either way, it’s usually best to keep things simple and get paid along the way.
Other trade management methods
Fibonacci lines and Pivot Points can be another great set of tools to identify areas that can be sold or covered. We cover these strategies in depth in the links provided.
To simplify things, though, there’s an old adage you should remember: “sell yourself hard.” The point here is to identify stocks that are “oversold” or “oversold” and sell or cover those moves.
The liquidation of OCGN was swift and furious in the open that morning. This type of selling pressure is not sustainable for any normal stock.
Recognizing this, most traders will sell or cover the excessive strength or weakness, knowing that a rally could be just around the corner.
One way to visualize an overextension is to judge the extent of a stock from its 10 or 20 moving averages. As shown in the graph above. OCGN expanded considerably from the blue 10th of the chart. This is a good sign that the action will be reversed at some point.
There are a myriad of ways to manage operations and they all have their pros and cons. It’s really up to you to practice what works best for you in order to identify profit goals and get the emotions out of the trade.
Practicing the 3 Bar Play
This brings us to our last point. No strategy will be perfect, however, unless you know your likelihood of success through craft simulations, you will literally bet.
Unstable amounts of stress and failure can be attributed to markets to trade without advantages. For this reason, we recommend that you do a quick search on the stock simulator that is separated up or down in the market with a certain volume. Then take this list of actions and identify the best candidates for a 3 Bar Play.
The following is an example of what this scan filter might look like for differences:
In this filter example, we have chosen stocks over $ 5, with a minimum pre-marketing gap of 2% and at least 100,000 shares traded.
The rest is up to you. As we mentioned at the beginning of the article, there are many great educators who teach this strategy through live trading and fantastic video resources. Sami Abusaad, Jared Wesley and Oliver Velez are just a few.
Be sure to check out their YouTube pages and give them a taste.
Here are some good ones!
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