How to Trade the Three-Bar Reversal Pattern in Binary Options

What is the Three-Bar Reversal Pattern?

The Three-Bar Reversal Pattern is a trend reversal candlestick pattern. It occurs at the end of a particular trend signaling the reversal of such a trend.

The candlestick pattern is made up of three candlesticks and is simple to use.

There is a typical or normal three-bar reversal pattern for different trading styles.

Then there is an enhanced one by Alton Hill for day trading.

The two are almost the same, just that Alton’s is enhanced and has a higher win probability.

Typical Three-Bar Reversal Pattern.

Here are the specifications of the normal three-bar reversal pattern:

• Bullish Pattern: The first candlestick is bearish. Another bearish one then follows, whose low is below the low of the first. The third or last candlestick of the pattern is bullish and closes above the high of the second candlestick of the pattern.
• Bearish Pattern: The first candlestick is bullish. Another bullish one then follows, whose high is above the high of the first. The third or last candlestick of the pattern is bearish and closes below the low of the second candlestick of the pattern.

Enhanced 3 Bar Reversal Pattern.

Here are the specifications of the second type of the three-bar reversal pattern, the enhanced one by Alton Hill:

• 3 bar Bullish Pattern: The first candlestick is bearish. Another bearish one then follows, whose low is below the low of the first. The third or last candlestick of the pattern is bullish and closes above the highs of both the first and second candlesticks of the pattern.
• 3 bar Bearish Pattern: The first candlestick is bullish. Another bullish one then follows, whose high is above the high of the first. The third or last candlestick of the pattern is bearish and closes below the lows of both the first and second candlesticks of the pattern.

So which three-bar reversal pattern are we going to talk about here?

Well, both are three-bar reversal patterns, only that one is enhanced.

So how about we talk about both? It would be awesome.

Wondering how you can trade the three-bar reversal pattern in Olymp Trade?

Come with me as we explore exactly how to profitably trade the three-bar reversal pattern in Olymp Trade, in this post.

Trading the 3 Bar Reversal Pattern in Binary Options.

So far, you already have a picture of what the 3 bar reversal pattern looks like.

What remains is to get the dynamics of how to go about trading such a reversal pattern. 

Here are the simple steps to trading the Three-Bar Reversal Pattern in Olymp Trade:

1. Establish the Market Trend.

The three-bar reversal pattern is a trend reversal pattern.

What else would be there to be reversed other than a market trend?

Well, of course, nothing else but a healthy or strong market trend.

That then means that the first-ever step would be to establish a market trend.

Doing so would also give you a hint of what kind of three-bar reversal pattern to expect – whether bullish or bearish.

You expect a bullish three-bar reversal pattern towards the end of a downtrend and a bearish three-bar reversal one towards the end of an uptrend.

Well, do you know how to establish a market trend?

It is of course no rocket science to do so because you can just observe price action or use moving averages.

A market that forms higher highs and higher lows as the price trades above moving averages is an uptrend.

On the other hand, a market that forms lower highs and lower lows as the price trades below moving averages is a downtrend.

Should you avoid sideways trending markets?

Definitely not.

In such a case, you expect bearish three-bar reversal patterns at the resistance and bullish three-bar reversal patterns at the support.

2. Spot the 3 Bar Reversal Pattern.

The next step after establishing the market trend is to hunt for trading signals.

The best traders do not wait for trading signals to form out of the blues.

They diligently hunt for the signals, while still exercising patience though.

Do you remember what the bullish and bearish three-bar typical and enhanced reversal patterns look like?

A quick reminder would do no harm and so here it is.

Trading Signals.

• 3 Bar Bullish Typical Pattern: The market is in a downtrend or trading towards or at the lower level of a price range (support). First, a bearish candlestick appears, followed by another bearish one whose low is below the low of the first. The third or last candlestick of the pattern is bullish and closes above the high of the second candlestick of the pattern.
• 3 Bar Bearish Typical Pattern: The Market is in an uptrend or trading towards or at the upper level of a price range (resistance). First, a bullish candlestick appears, followed by another bullish one whose high is above the high of the first. The third or last candlestick of the pattern is bearish and closes below the low of the second candlestick of the pattern.
• 3 Bar Bullish Enhanced Pattern: The market is in a downtrend or trading towards or at the lower level of a price range (support). First, a bearish candlestick appears, followed by another bearish one whose low is below the low of the first. The third or last candlestick of the pattern is bullish and closes above the highs of both the first and second candlesticks of the pattern.
• 3 Bar Bearish Enhanced Pattern: The Market is in an uptrend or trading towards or at the upper level of a price range (resistance). First, a bullish candlestick appears, followed by another bullish one whose high is above the high of the first. The third or last candlestick of the pattern is bearish and closes below the lows of both the first and second candlesticks of the pattern.

Three-Bar Reversal Pattern Exceptions.

Is the second candlestick of the three-bar reversal pattern an outside bar?

If yes, you must then take caution. Outside bars usually highlight a looming unprecedented price behavior.

3. Enter Buy or Sell Position.

For all the scenarios, you should enter a position at the close of the third candlestick of the pattern. Here are the specifications:

• Bullish Typical Pattern: Enter the Buy position at the close of the third bullish bar of the pattern which closes above the high of the second bar of the pattern.
• Bullish Enhanced Pattern: Enter the Buy position at the close of the third bullish bar of the pattern which closes above the highs of both the first and second bars of the pattern.
• Bearish Typical Pattern: Enter the Sell position at the close of the third bearish bar of the pattern which closes below the low of the second bar of the pattern.
• Bearish Enhanced Pattern: Enter the Sell position at the close of the third bearish bar of the pattern which closes below the lows of both the first and second bars of the pattern.

4. Adjust Stop Loss and Take Profit.

How you adjust your Stop Loss depends on whether you are trading the typical or enhanced three-bar reversal pattern. Here are the specifications:

• Buy Typical Pattern Position: Stop Loss just below the low of the third bullish bar of the pattern.
• Buy Enhanced Pattern Position: Stop Loss as tight as possible. Alternatively, cut down the trade size if you place Stop Loss below the low of the third bullish bar of the pattern. The reason is that the signal candlestick is a wide range or longer than the average candlestick.
• Sell Typical Pattern Position: Stop Loss just above the high of the third bearish bar of the pattern.
• Sell Enhanced Pattern Position: Stop Loss as tight as possible. Alternatively, cut down the trade size if you place Stop Loss above the high of the third bearish bar of the pattern. The reason is also that the signal candlestick is a wide range or longer than the average candlestick.

You should adjust Take Profit according to a risk-to-reward ratio of at least 1:2.

However, if trading a range, take profit at the opposite range level to that of trade entry.

Take profit at support if you entered at resistance or at resistance if you entered at support.

Also Read: – HOW TO APPLY THE BELT HOLD CANDLESTICK PATTERN TO YOUR TRADING IN 2023.

Wrapping up – 3 bar reversal pattern.

Do you find anything difficult in trading both versions of the three-bar reversal pattern? I guess not.

What then keeps you from logging into your Olymp Trade account right away and trying the pattern out?

You will find it easy and simple to use, exactly as easy and simple as it appears in this guide.

Happy Trading!