Trading Bar Patterns: Profitable or not, that tis the question?
Recently while reading, I came across several bar groups that are used to predict short term direction of the market. Of course if you know the direction of the market, then you can use these bar groupings to make short term trades. This is no new idea, but the writer stated that these bar patterns would work in any market. That’s when I thought to myself: The Forex, we will see?
Bar groups or patterns use the inter-bar High, Low, Open, and Close relationship with each other. These relationships are supposes to paint a picture as to what the market is doing. For example, one pattern might signal that consolidation is occurring. Another bar group could be showing where resistance has come into the market. While yet another, could be displaying where support is in the market.
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Locating where the market has formed resistance, support, or consolidation, is a great place of a potential trade and is worth our attention. In the following pages we will look at seven different bar patterns/groups. We will look at the rules that define these patterns and identify what the patterns are trying to tell use about what the market is doing. Finally, we will look at how these seven different bar patterns faired testing in Forex market.
First bar group setup: The following bar pattern consists of three bars. The high of bar 3 needs to be greater than the high of bar 2. The close of bar 2 needs to be less than the close of bar 1. The low of bar 1 needs to be greater than the low of bar 2. The high of bar 1 needs to be greater than the high of bar two. If these conditions occur then we are going to buy 1 pip above the high of bar 3.
This bar grouping is looking for pullbacks and then continuation of the trend or reversals that occur at the end of a trend.
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Second bar pattern setup: The second bar pattern setup contains three bars. The high of bar 3 needs to be greater than the high of bar 2. The close of the 2nd bar needs to be less than the close of bar 1. The low of the 2nd bar needs to be less than the low of the 3rd bar. The open of the 1st bar needs to be less than the close of bar 2. The close of bar 1 needs to be greater than bar 2. The low of bar 1 needs to be less than the low of bar 2.
Buy 1 pip above the high of bar 2. This particular pattern is looking for 3 consecutive lows or “bottom”, then it’s looking for the market to reverse.
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Third bar group setup: The pattern below consists of three bars. The high of bar 3 needs to be greater than high of bar 2. The close of bar 2 has to be less than the close of bar 3. The open of bar 1 needs to be greater than the close of bar 2. The high of bar 1 has to be greater than the high of bar 3. Buy 1 pip above the high of the 1st bar.
This bar grouping is looking for temporary pullbacks in the market, before a continuation.
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Fourth bar pattern setup: The fourth bar pattern is made up of 3 bars. The high of bar 3 needs to be greater than the high of bar 2. The high of bar two has to be greater than the high of bar 1. The low of bar 3 needs to be less than the low of bar 2. The low of bar 2 has to be less than the low of bar 1.
This bar pattern can be traded in either direction, both long and short. Buy 1 pip above the high of bar 3. Sell short 1 pip below the low of bar 3.
This pattern is looking for a breakout from consolidation that has come into the market.
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Fifth bar pattern setup: The fifth bar pattern setup contains three bars and two small bars that are within the range of the 1st bar. The low of the 2 bar has to be less than the low of bar 3. The low of bar 1 needs to be less than the low of bar 2. The high of bar 3 needs to be greater than the high of bar 2. The high of bar 2 has to be greater than the high of bar 1. Sell short 1 pip below the low of bar 1.
This pattern looks for a pullback within a downward trend and then looks for the market to breakout to the downside.
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Sixth bar grouping setup: The bar grouping below consists of four bars. The high of bar 4 has to be less than the high of bar 3. The close of bar 3 has to be greater than the close of bar 2. The close of bar 2 has to be less than the close of bar 3. The open of bar 1 has to be less than the close of bar 2. The close of bar 1 has to be greater than the close of bar 2. Buy 1 pip above the high of bar 3.
The bar grouping below is looking for a breakout after a small one day pullback and then a continuation.
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Seventh bar pattern setup: The seventh and final bar pattern setup contains four bars. The high of bar 3 has to be less than the high of bar 4. The close of bar 3 has to be greater than the close of bar 4. The high of bar 2 has to be greater the high of bar 3. The close of bar 2 has to be less than the close of bar 3. The low of bar 1 has to be less than the low of bar 3. The close of bar 1 has to be greater than the close of bar 3. Buy 1 pip above the high of bar 2.
The bar pattern below is looking for a market that has moved into a range and is ready for a breakout.
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Summary
At the beginning of this report we asked the question, Will my futures/commodities trading system work in the Forex market?”. While there are some similarities between the futures and Forex markets, they are different markets and you will need to do independent testing.
This is at least the answer that we should have obtained from the testing that was conducted on the Three-bar Pullback System.
The interesting thing about testing is that no matter the outcome, rather profitable or unprofitable, you should always learn something new about the market you are conducting your tests.
For example, from our testing it appears that rather a bar closes up or down has more importance, when using this pattern, than the high or low prices does. This probably is no big surprise. However, both were profitable when used separately and when used together you obtain even better results.
Something else that the testing showed was that the filter did not help results. I would have expected the results to have been better when you filtered out sideways markets, but this was not the case.
The modified three-bar pullback system has the potential to be a profitable system. In this report you have been given a profitable entry as well as some direction on a time exit. I’m sure with additional testing with stop losses and exits; that a profitable system will emerge.
One valuable quality that this entry did exhibit was the ability to be either right or wrong very quickly. This should help in designing a profitable stop loss.
With that said, I do encourage you to test any system that you have used successfully in the commodity and/or futures markets before you make the assumption that it will be profitable in the Forex Market. Until next time…
Good trading,
Jason Fielder
Developer, Forex ImpactTM
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