April 10, 2020 at 8:48 PM #261212Nitin BhatiaKeymaster
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One of the most popular Stock Market Reversal Patterns is the 3-day rule. The 3-day rule was shared by Martin Schwartz who was the author of the book Pit Bull – Lessons from Wall Street’s Champion Trader. Under this rule, you will observe 3 days of a big move. It is normally observed after the up move or a downtrend i.e. the stock or index should be in a trend.
The 3-day rule is mostly used for the swing trades and should be used on the daily time frame. Some of the most important points for the 3-day rule are as follows
1. The moves should be big. Some professional investors or traders, also follow a sub-rule i.e. size of the candles should be in the descending order i.e. the first candle should be bigger than the second candle and so on.
2. The 3-day rule suggests that to check the reversal pattern, the candles should form the higher highs or lower lows.
3. On day 4, In case of an uptrend, you should buy in case the closing is above the high or 3rd-day candle. However, in case of a downtrend, you should sell below the low of 3rd day’s candle.
4. You should not trade in the direction of the trend in the case of 3 pullbacks. It signals the reversal of the market.
5. The trading psychology behind the 3-day rule is that the first candle is formed by smart money. The second candle is formed by the semi-smart money and the third candle is formed by the retail clients.
The 3-day rule only suggests whether the market is forming a reversal pattern or not.
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