Three Bar Rule Versus Healthy Consolidation
Three Bar Rule Versus Healthy Consolidation
The Pristine Method (TPM) is a unique, objective, systematic, technical approach to trading candlestick price patterns. In TPM Part 1, we teach identifiable patterns that stocks trade in, and then show the exact strategies of what to do in each stage of a stock's movement, including how to enter, manage, and exit the trade. In TPM Part 2, we have an entire chapter devoted to Failed Patterns. They are extremely important for three reasons. First: To see and capitalize on "new opportunity" when a pattern fails and sets up a new profitable trade. Seasoned TPM2 graduates love these! Second: To know how best to manage a position before it fails by evaluating the charts objectively. Third: To help you in disaster management mode in the unlikely event that you are in a position that has failed. Knowing this information helps keep you objective, and allows you to both profit and minimize losses.
One Failed Pattern we teach is the Three Bar Rule (whether that means to exit the trade or enter as new opportunity depends on the overall pattern and market environment). But let's assume you entered a stock with a perfect "quality" price pattern that suggested an immediate move up with bullish market internals. It could have been a Pristine Buy Setup (PBS), a Climactic Buy Setup (CBS), or a Pristine Breakout (PBO), timed with the Futures at the 10 a.m. reversal period. The Pristine Three Bar Rule states: If the setup is not doing as suggested within three (3) bars, either exit or reduce the position. So that begs the question, "How does one know when the setup is not doing as suggested?" Note that this must be used only in the time frame being used. Some incorrectly believe, for example, that they should bail on a daily setup because the intra-day pattern is not moving. No, that is incorrect, as it may be a healthy consolidation in the trading time frame chosen.
Here are a few questions to ask in considering whether to close a trade early before the stop is triggered because it "is not doing as suggested":
1. Did the trade violate every single reason for entry? Did it take out intra-day major pivot lows? Is it a healthy consolidation that might actually be an opportunity to add to your position?
2. Assess the situation from the standpoint as if you were not in the trade, based on The Pristine Method. What would you tell a friend about the technical setup? Is the pattern "quality" decreasing? For example, are the intra-day charts getting very volatile, with overlapping bars, No Follow Through (NFT) to bullish/bearish bars; Breakout Bar Failures (BBF), shakeouts, etc.?
3. How far has the stock already moved? Is the current stop and reward-risk still adequate?
4. Are multiple time frames in alignment?
5. Are market conditions (broader market, sector analysis, and market internals) favorable for the trade direction?
6. Did the stock move with the sector and market internals, or is it lagging, showing relative weakness?
7. What time of day is it? Is it a low volume doldrums summer day with everything going sideways, or is your position underperforming?
8. Is the position distracting you from other trade opportunities?
You must overcome the temptation to act prior to gaining information needed out of fear of missing the trade. Selling out of fear that the market will move against you, rather than that of an issue or internal being at a point of supply or demand, must be fought. You must have the patience and discipline to logically apply The Pristine Method! Always have at least two scenarios when entering trades, no matter how bullish or bearish. This will keep you open to other possibilities. Remember, anything can and will happen at times!
These are just a few of the many details you should consider. Over a very short period of time once you apply the information you have acquired through learning the Pristine Method, more and more will become second nature in helping you take and manage quality trades on a regular basis.
Come join us in the FTR (Futures Trading Room) where we are CONSISTENTLY making good trades on a daily basis!
KURT CAPRA
Contributing Editor
Interactive Trading Room Moderator
Futures Trading Specialist
Instructor and Traders Coach
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