The Three-Bar Reversal with Ease of Movement in bar three of the pattern is one of the better patterns I have seen in markets on all time frames.
Chart 1: Nasdaq 5-minute chart with the Three-Bar Reversal pattern (3BR+/-).
When there is a high reading of effort vs. result, it indicates that the market
moved an unusually large magnitude for the amount of volume utilized.
When there is a high reading of effort vs. result, it indicates that the market
moved an unusually large magnitude for the amount of volume utilized.
First, you would not want to go against ease of movement anyway, but when it also shows laboring on the middle bar (bar 2), it is an even stronger indication. If the first bar of the pattern has an effort vs. result reading lower than bar 3, it is even more convincing. If bar 1 is also laboring along with bar 2, and then bar 3 reverses both bars completely, that is the strongest possibility.
Generally, I don’t have to have a pattern to trade, but the convenience of a three-bar reversal is the risk management that is naturally provided with the pattern. In the case of a 3BR+ with ease of movement in bar 3, the stop can be placed below the low of the 3rd bar or below the low of the whole pattern, a more conservative stop. After a pattern like this, pullbacks should be used for long entries with stops at the crucial areas. If stopped out, you know there was a failure, and an exit is a good decision.
Chart 2: A close-up of the reversal at (D), showing bars 1 and 2
laboring before bar 3 reverses with ease of movement.
The 3BR is related to the two-bar reversal (2BR), the four-bar reversal (4BR), and the outside bar (OB), which is a form of all the above in most cases. But with an outside bar, you want to be sure you get a significant reading of ease of movement. They are all frequently developing in major reversal areas.
