3 Bar Reversal Pattern ( Strategy Wizard )

        This strategy is from an article  by Thomas Bulkowski ”Are Three-Bar Patterns Reliable For Stocks?” . It was in the  January,2000 issue of Stocks&Commodities magazine. As an aside, I want to mention, that there are a lot of things called “Three Bar Reversals’, but I am just looking at this particular one.

        This strategy was done in strategy wizard using NinjaTrader so those who are not into C# programming, can fool around with it. You can import this strategy with File->Utilities->Import NinjaScript. Ninja expects a zip file when you import so don’t unzip the file after you download it, just import it as is.

THREE BAR REVERSAL

        I coded this up in NinjaTrader ( Sorry Tradestation people ) for use on daily charts and then I tested it on one stock. I chose AAPL for two reasons (1) I love Apple computers (2) It comes first alphabetically. I also like to trade AAPL stock, it is one of my favorites trading stocks.

        It is a stop and reverse system, which means it is always in the market. When it gets a buy signal, it goes long, when it gets a sell it closes the long position and goes short. Some people like this style of trading system, some people do not.

Rules :

- Day two of the three-day pattern has the lowest low / highest high of the three days.

- Day three  must have a close above the prior day’s high/low.

- No DoJi’s

If you want the full details , you can order a reprint from the net.

I discovered this gem of a pattern while prospecting for ideas in a recent issue of STOCKS & COMMODITIES.In the interview with Kevin Haggerty was the following pattern description: One example [to determine a change in direction ]is a three-bar pattern,which is the same one that futures traders use.The stock establishes a low price as a swing point.Once the stock closes above the high of the low day,to me,that is a change of direction for an undetermined period. Using this description as a guide,I decided to formalize the shape and behavior of the pattern.

-Thomas Bulkowski

        So I tested this system from Jan 1, 2008 to today, April 4, 2009. No particular reason why I picked that date, I just wanted to start on a Jan 1. It ran for 16 months in backtesting, and the results are in the image about. You can click it for a larger image.

        Now admittedly, AAPL is a very volatile stock, that I do like to trade, so this probably does not represent your average stock. However, it has been a very volatile period and a lot of equities have been trading like AAPl stock.

        The strategy returned $84 a share over the 16 monhts, and had a win/loss ratio of 53%. Just a little better than flipping a coin but the profit came from the win /loss ratio. The wins were 50% greater than the losing trades. Average trade was over a week, which is a doable rate for the retail trader who cannot watch the market all day. The profit percentage was 4.41% percent a month.

WHAT CAN BE DONE TO IMPROVE THIS STRATEGY

        I think there is a lot to be said for this strategy. However, it is an ‘always in the market’ kind of strategy that can get caught in a downdraft. So here are some suggestions ( If you try any of these, let me know and I will update this post )

1. If used on a portfolio, use a portfolio normalization scheme for position sizes.
2. Stop Loss at support and resistance levels.
3. Profit Stop.
4. Test performance on ETF’s

WHERE CAN I DOWNLOAD THIS

        You can download this here,3 Bar Reversal Strategy . Enjoy

None of this is investment advice. This is just a strategy I coded for entertainment purposes only. Nothing more. Whatever you do with this is up to you. There is no warranty expressed, adumbrated, implied, insinuated, inferred, implicated, aspersed, or otherwise in existence.

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