3 Bar Play Pattern Explained
The 3 Bar Play Pattern is a trading strategy originally coined by Jared Wesley and primarily used for day trading stocks on lower time frames.
This article explains how the setup works, the variations, and how it can be combined with other trading strategies.
Read the best stock charting software article to discover the best solutions with integrated 3 bar play pattern recognition features.
Bars vs. Candles
Before we start, let’s take care of the term “Bar” since it is a main component in the 3 Bar Play Pattern.
A bar is basically the same as a candle when it comes to charting.
A candlestick chart visualizes price movements with details about the open, high, low and close of a period, and the bar chart does the same.
Only the visualization is different.
While the candlestick chart has candlestick bodies (price difference between the open and close of a period), the bar chart does not have such ones, and you only see horizontal and vertical lines in a bar chart.
I’m not sure why Jared Wesley uses candlestick pattern terms when he describes the setup but at the same time calls the pattern a 3 Bar Play Pattern instead of a 3 Candlestick Play Pattern, but likely because candles and bars are similar.
The important thing you should understand is that even if the strategy contains the word “Bar,” we don’t use a bar chart for visualization and candlestick charts instead.
3 Bar Play Pattern
The 3 Bar Play Pattern is a trading strategy characterized by three to four consecutive candles. It helps identify potential buy/sell patterns in the market.
We enter the position when the highs of the reference candles break to go long or when the lows of the reference candles break to go short.
The stop loss for long trades is below the lowest price created by candles 2 or 3. The stop loss for short trades goes above the highest price of candles 2 or 3.
The first candle is called the Igniting Bar and sets the stage for the whole candlestick pattern, with a subsequent controlled pullback with a small candle in a tight range.
A big benefit of the trading setup lies in its simplicity and momentum potential. When the potential unfolds, prices can move quickly, while when the breakout does not end up in a fast move, it’s better to exit the trade immediately since the immediate momentum is a crucial component.
3 Bar Play Long Setup
The first candle of the 3 Bar Play Long should be an “igniting” one with a wide price range (a wide range is a range double the size of an average candlestick range), with a closing price near the high.
Keep in mind the first candle means the first candle of the setup. So, the first candle does not have to be the first candle of the day when using intraday charts, but when it is a candle later in the day, the overall price action should have been bullish with high momentum.
The second candle needs to be narrow range bars with a small candle body and small shadows. The full candle length should be in the upper 50% of the first candlestick. Also, the high of the first and second candles should be relatively close together.
Both the first and second candles should appear near the high of the day since this is a momentum long setup that needs a strong market.
Finally, the third candle breaks the highs of the first and second candles and triggers the long trade.
Variation of the 3 Bar Play Long Setup
Sometimes, the market consolidates on a high level, resulting in a third period that is narrow and near the high of the day. It is like a flag pole with a flag consisting of 2 narrow candles near the top. In this case, the 4th candle can trigger the long trade by breaking out to new highs on high momentum.
3 Bar Play Short Setup
The first candle of the 3 Bar Play Short should be an “igniting” one with a wide price range (a wide range is a range double the size of an average candlestick range), with a closing price near the low.
The second candle needs to be narrow range bars with a small candle body and small shadows. The full candle length should be in the lower 50% of the first candle. Also, the low of the first and second candles should be relatively close together.
Both the first and second candles should appear near the low of the day since this is a momentum short setup that needs a weak market.
Finally, the third candle breaks the lows of the first and second candlestick and triggers the short trade.
Variation of the 3 Bar Play Short Setup
Sometimes, the market consolidates on a low level, resulting in a third period that is narrow and near the low of the day. It is like a flag pole with a flag consisting of 2 narrow candles near the bottom. In this case, the 4th candle can trigger the short trade by breaking down to new lows on high momentum.
3 Bar Play Combination with Opening Range Breakout
The opening range breakout is a great day trading strategy because it’s easy to understand, interpret and trade. Even automated trading is simple to implement, and the combination of the 3 Bar Play and opening range breakout strategy can increase profitability.
The opening range is the price range of the first candle of the day. Once the price goes above the first candle’s high or below the first candle’s low, the opening range breakout (ORB) gets triggered.
So if you have, for example, a bullish first candle with a wide green body, then a second candle with a tight range in the upper 25% of the first candle and then a breakout of the inside bar and the opening range, then, voila, you have a good chance for even higher breakout momentum.
Risk Management Techniques
Effective risk management is essential when trading the 3 Bar Play Pattern. Those who trade fixed share sizes will quickly realize that the risk-reward ratio is kind of unbalanced over time.
That’s because the distance between the entry price and exit price differs from trade.
Therefore, trading with fixed share sizes is not the best option.
Instead, R-values should be used. R defines the risk per trade, and the number of shares gets calculated considering the max loss per trade and the distance between entry and stop loss.
Let’s say you define 1R with $100. That means that you are willing to risk a maximum of $100 per trade.
The distance between the entry and the stop loss is $0.50.
Now, you can calculate the number of shares traded in this case:
Number of traded shares = Risk per Trade in $ / Distance entry vs. stop loss
- Risk per Trade: $100
- Distance: $0.50
- Number of shares: $100/$0.50=200 shares
Stop Loss Techniques
The stop loss is trailed closely and initially set below the low of the consolidation zone for long trades and above the consolidation zone for short trades.
3 Bar Play Strategy Summary
The 3 Bar Play Pattern is a great price action trading pattern and day trading setup, which can be used to trade volatile price movements shortly after the market open. Once the breakout or breakdown happens, the momentum should get in immediately since this is an essential part of the setup. If the momentum does not unfold immediately, it’s better to exit the trade.
More About Charts, Candlesticks and Trading Patterns: