As of 01/17/2025   Indus: 43,488 +334.70 +0.8%     Trans: 16,431 -169.75 -1.0%     Utils: 1,013 +1.53 +0.2%     Nasdaq: 19,630 +291.91 +1.5%     S&P 500: 5,997 +59.32 +1.0%	YTD  +2.2%    +3.4%    +3.0%    +1.7%    +2.0%	Targets    Overview: 01/15/2025     44,700 or 41,600 by 02/01/2025   17,200 or 15,700 by 02/01/2025   1,050 or 950 by 02/01/2025   20,500 or 18,670 by 02/01/2025   6,100 or 5,700 by 02/01/2025
Chart Pattern Indicator: on 1/13/25

As of 01/17/2025   Indus: 43,488 +334.70 +0.8%     Trans: 16,431 -169.75 -1.0%     Utils: 1,013 +1.53 +0.2%     Nasdaq: 19,630 +291.91 +1.5%     S&P 500: 5,997 +59.32 +1.0%	YTD  +2.2%    +3.4%    +3.0%    +1.7%    +2.0%
Targets    Overview: 01/15/2025     44,700 or 41,600 by 02/01/2025   17,200 or 15,700 by 02/01/2025   1,050 or 950 by 02/01/2025   20,500 or 18,670 by 02/01/2025   6,100 or 5,700 by 02/01/2025
Chart Pattern Indicator: on 1/13/25

Bulkowski on Three-Day Trend Compression Pattern

Initial release: 12/5/24.

I learned of the three-day compression (3DC) pattern from an article in Technical Analysis of Stocks & Commodities magazine (February 2024, page 26, "The Trend Compression Pattern" by Andrea Unger.

The author used futures to test the pattern to improve the performance of entering trades. He used it as a filter. This article describes tests only on the 3-bar pattern, not how it can improve a trading setup.

Important Results Identification Guidelines Testing Stock Performance ETF Performance Crypto Performance See Also

3DC

3DC: Important Bull Market Results

The 3DC pattern performs best in stocks (especially in downtrends when it acts as a reversal), is a mediocre performer in ETFs (only in a rising price trend leading to the pattern), and it underperforms the benchmark in cryptocurrencies.

To check the performance against other small patterns, click the link.

3DC: Identification Guidelines

3DC: Testing

Look at the associated image of a 3DC pattern.

In tests of the pattern, I used a buy stop (C) placed a penny above the top of the pattern (above the highest of the three bars) and a stop loss order (B) a penny below the bottom of the pattern (below the lowest of the three bars). A target exit was twice the height of the 3DC added to the top of it.

I only tested bull markets and upward breakouts. If price that day climbed above the top of the pattern and also below the bottom of it, I ignored the pattern and looked for a new pattern. This is a flaw in my test, of course. I didn't want to enter a trade and be stopped out the same day. Thus, my results are optimistic (meaning the pattern will likely perform worse in actual trading). One way around this situation is to enter the trade the day after an upward breakout. In other pattern tests, I've found that waiting to enter the next day (at the open) makes performance worse.

For a more detailed explanation of the method I used to test small patterns, see the link.

3DC: Stock Performance

The chart shows an example of a trade.

I highlight the 3DC in the red box, on the daily chart. Price broke out upward from the pattern, triggering an entry. A stop loss was placed a penny below the bottom of the 3-day pattern.

The stock didn't rise far enough to reach the target exit (twice the height of the 3DC added to the top of it). Instead, a stop loss order closed out the trade for a loss.

Testing

As explained in the example above, I used a target exit placed twice as high as the height of the 3DC pattern. I placed a stop loss a penny below the bottom of the pattern to help limit losses.

The following table shows results for bull markets with upward breakouts and an inbound upward or downward price trend. I used 490 stocks in the test.

The 3DC pattern in stocks performs best if the inbound price trend is down (gains of $104.70 versus $83.91 for the benchmark). That means reversals outperform 3DC patterns acting as continuation patterns.

3DC: ETF Performance

The associated chart shows an example of how I tested the 3DC pattern in exchange traded funds (ETFs).

Again, the red square shows the 3DC. A day after the pattern ended, the close was high enough to trigger the buy stop.

A stop loss a penny below the bottom of the 3DC helped limit the effects of adverse moves (in theory).

Computing the height of the 3DC (times two), added to the top of the pattern, gives a target price at which to exit. As you can see, the ETF trade reached the target when the stock gapped open higher.

Testing

This is the same test as the prior one except I used 94 exchange traded funds (ETFs) instead of common stocks.

The table shows that the upward inbound trend direction slightly outperforms the benchmark ($74.51 versus $68.94), but the downward trend underperforms ($62.67 versus $68.340, respectively. The results follow similar trends for trading in ETFs, meaning short pattern don't perform well.

3DC: Crypto Performance

The chart on the right shows how I tested performance in cryptocurrencies.

Here's a 3DC in the cryptocurrency, AAVE-USD.

The square highlights the 3DC. A day after the pattern ends, we enter the trade on the upward breakout and set a stop loss order a penny below the 3DC.

The currency rises and reaches the target exit where the trade is closed for a profit.

Testing

For both inbound trend directions, the 3DC underperforms the benchmark. Don't use this pattern to trade cryptocurrencies.

-- Thomas Bulkowski

See Also

• How did I test small patterns in stocks, ETFs, and crypto currency?
• Small pattern performance.
• Updated daily list of short patterns.
• Gap2H -- the non-inverted version
• Inverted gap 2H
• Shark-32

I have flabby thighs, but fortunately my stomach covers them.