As of 11/20/2024   Indus: 43,408 +139.53 +0.3%     Trans: 17,002 -26.31 -0.2%     Utils: 1,055 +1.25 +0.1%     Nasdaq: 18,966 -21.33 -0.1%     S&P 500: 5,917 +0.13 +0.0%	YTD  +15.2%    +6.9%    +19.7%    +26.3%    +24.1%	Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

As of 11/20/2024   Indus: 43,408 +139.53 +0.3%     Trans: 17,002 -26.31 -0.2%     Utils: 1,055 +1.25 +0.1%     Nasdaq: 18,966 -21.33 -0.1%     S&P 500: 5,917 +0.13 +0.0%	YTD  +15.2%    +6.9%    +19.7%    +26.3%    +24.1%
Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

Bulkowski on the 3L-R

I found out about the 3L-R pattern from an article in Traders.com (a printed magazine, not the website) and according to the author Paolo Pezzutti, it's based on the work of Michael Harris.

The article suggests using a 7% profit target and 7% stop loss, which I tested. I also tested placing a stop at the other end of the pattern (for an upward breakout, for example, it would be a penny below the pattern's lowest low). One can infer that 3L-R means three lows and a reversal, which aptly describes the four-bar pattern.

Updated with new performance information on 10/28/24.

Important Results Identification Guidelines Trading Tips Performance Statistics Performance and Failure Rates Measure Rule Trading Performance Trading Performance with Pattern Stop Trading Example Target Exit, Stock Performance   Target Exit, ETF Performance   Target Exit, Crypto Performance  See Also

3L-R

Important Bull Market Results for 3L-R

3L-R Identification Guidelines

3L-R Trading Tips

3L-R Performance Statistics

For the following statistics, I used 1,242 stocks, starting from December 1989 to February 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. Since samples were so numerous, I chose one of every four patterns. There were two bear markets in the 2000s (as determined by the S&P 500 index), from 3/24/2000 to 10/10/2002 and 10/12/2007 to 3/6/2009. Everything outside of those dates represents a bull market.

For each 3L-R, I found where the trend started and when it ended. To find the trend peak or valley, I found the lowest valley and highest peak within plus or minus 10 days (21 days total) each, before the 3L-R and the same peak/valley test after the 3L-R. The closest valley or peak before the 3L-R is where the trend began. The closest peak or valley after the 3L-R is where the trend ended. I compared the peak or valley to the average of the highest high and lowest low price of the 3L-R pattern.

The 10-bar peak or valley number tends to find major turning points on the daily charts.

I measured performance from the day after the pattern ended to the nearest trend peak or trend valley.

3L-R Performance and Failure Rates

Table 1 lists the failure rates, sorted by market condition along with the average rise. Since the 3L-R is supposed to act as a reversal of the downward trend, I assumed an upward breakout (upward move).

A failure occurs when the stock fails to climb more than 5%.

The failure rates may appear high, but that's typical for short-term patterns like the 3L-R. The highest failures occur in a bull market: 38% fail to rise at least 5%. The average rise is just 9%.

3L-R Measure Rule

Table 2 shows how often the measure rule works. Use the measure rule to find an estimate of how far price is likely to rise.

To do this, measure from the highest high to the lowest low in the pattern to get the height. Add the height to the highest high to get the target.

The best performance of the measure rule occurs in a bull market, with 56% of patterns reaching their target.

3L-R Trading Performance

Table 3 shows the performance based on 24,613 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No adjustments were made for interest, fees, slippage and so on.

The results are sorted by bull or bear market. The trades used the same setup as listed in 3L-R Performance Statistics. This test bought a stock at the open the day after the pattern completed. If the opening price was unavailable (in my database, many from the 1990s were 0), then I assumed a penny above the top of the pattern as the entry price. If the open was higher than the buy stop, the opening price was used.

A position was sold if the stock climbed at least 7% above the buy price. Again, if the opening price was higher than the target price, I used the open, otherwise, I used the target price. A stop was placed 7% below the buy price.

For example, in a bull market, the net gain was $75.93 for all trades. The method won 57% of the time and there were 10,908 winning trades. The average gain of winning trades was $705.00.

Forty-three percent, or 8,356 trades were losers. They lost an average of $745.26.

The average hold time was 26 calendar days.

Notice how the gains and losses were pegged near 7%, which is how the test was setup.

3L-R Trading Performance With Pattern Stop

Table 4 shows the results of 24,753 trades, but this time, a penny below the bottom of the 3L-R pattern was used as a stop instead of a 7% stop.

For example, in a bull market the net gain was $43.76 for all trades. The method won 43% of the time and there were 8,263 winning trades. The average gain of winning trades was $702.98.

Fifty-seven percent, or 11,127 trades were losers. They lost an average of $445.78.

The average hold time was 15 calendar days.

When compared to the 7% stop method, placing a stop below the bottom of the pattern showed that losses dropped dramatically, especially in a bull market. However, the win/loss ratio suffered and that impacted the bull market net gain.

3L-R Trading Example

The figure shows a 3L-R pattern in 3M (MMM) on the daily scale.

The 3L-R looks like the inset with three lower lows followed by a high above the first high in the 3L-R.

The four bar pattern ends the day before A. Buy at the open at A, which is at a price of $94.34. The target is 7% above this, or $100.94.

The stock rises and hits the sell target as shown in the chart, at C.

A stop is placed 7% below the open, or 87.74 (not shown).

If the pattern stop method were used, the red line at B, which is a penny below the bottom of the 3L-R, would serve as the stop location.

3LR: Target Exit, Stock Performance

In the discussion that follows, I use twice the height of the 3LR as a price target to sell, and a stop loss order placed a penny below the pattern to limit adverse moves.

I show an example trade in 3D Systems (DDD) stock. Circled is the 3LR pattern. Price breaks out upward but it might be difficult to see on this chart. A stop placed a penny below the bottom of the 3LR helps to limit losses, in theory. In this case, the stock gaps open lower, cashing us out of the trade for a loss.

Testing

As explained in the example above, I used a target exit placed twice the height of the pattern above the top of 3LR. I placed a stop loss order to trigger a penny below the bottom of the pattern. For additional methodology details, see the link.

Tables 5, 6, and 7 show results for bull markets with upward breakouts and an inbound price trend either up or down. I used 497 stocks in the test.

The results for the 3LR pattern show that it barely beats the benchmark, and only in downtrends.

3LR: Target Exit, ETF Performance

I show a sample trade in iShares U.S. Aerospace & Defense ETF (exchange traded fund, ITA).

The 3LR is circled in red. I placed a stop-loss order a penny below the pattern's low to protect against a big loss, and a buy stop a penny above the high to enter the trade quickly.

The height of the pattern is the highest high minus the lowest low in the 4-bar pattern. Multiply that by two and add it to the pattern's high gives a price target for the setup. When price reaches the target, sell.

As the chart shows, the ETF missed the target and booked a loss.

Testing

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

The performance differences between the 3LR and the benchmark suggest this pattern isn't worth trading in ETFs.

3LR: Target Exit, Crypto Performance

This is an example trade in the cryptocurrency AAVE on the daily scale. I highlight the 3LR pattern in the red circle.

Entry is a penny above the top of the chart pattern with a buy-stop.

A stop-loss order helps minimize the loss with a sell price of a penny below the bottom of the pattern. The two green lines show the approximate buy stop and stop-loss order locations.

The currency broke out upward and soared, far surpassing the target.

Testing

This is the same test as the prior one except I used 38 crypto currency stocks instead of common stocks.

In both trend directions, the benchmark substantially outperforms the 3LR pattern. Don't trade crypto using the 3LR pattern.

-- Thomas Bulkowski

See Also

Below are other short patterns...

• How did I test small patterns in stocks, ETFs, and crypto currency?
• Small pattern performance.
• Updated daily list of short patterns.
• Inverted 3L-R

Q: What do you call a man with half a brain? A: Gifted.