Here is Alton Hill’s 3 bar play reversal pattern for day trading.
He believes the best bullish reversal pattern signals for day trading are three bar patterns, he wants the third bar (or candle) in the pattern to close above the highs of the previous two bars.
Long entry signal:
- Candle 1 closes down.
- Low of candle 2 is below the low of candle 1 and candle 3.
- Candle 3 closes above the high of both candle 1 and candle 2.
- Buy at the close of candle 3.
Here is the bearish short sell version of the same signal.
Short sell entry signal:
- Candle 1 closes up.
- High of Candle 2 is above the high of candle 1 and candle 3.
- Candle 3 closes below the low of both candle 1 and candle 2.
- Sell short at the close of candle 3.
Like any trades this signal must be managed with a stop loss if the breakout fails and returns inside the previous candle range. A profit target can be set for an overbought signal like the 70 RSI, back to a key support/resistance level on the chart, or a key moving average. This signal is best used to create an edge by managing trades for a 1:3 risk/reward ratio. Alton Hill believes the 5-minute chart time frame is the best place to use this strategy.
