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 Inverted 3L-R

Released 2/26/2013. Updated with new performance information on 10/28/24.

I found out about the inverted 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 a downward breakout, for example, it would be a penny above the pattern's highest high). One can infer that inverted 3L-R means the opposite of three lows and a reversal, which aptly describes the four-bar pattern (three highs and a reversal).

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

Inverted 3L-R

Important Bull Market Results for Inverted 3L-R

Inverted 3L-R Identification Guidelines

Inverted 3L-R Trading Tips

Inverted 3L-R Performance Statistics

For the following statistics, I used 1,243 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 inverted 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 inverted 3L-R and the same peak/valley test after the inverted 3L-R. The closest valley or peak before the inverted 3L-R is where the trend began. The closest peak or valley after the inverted 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 inverted 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.

Inverted 3L-R Performance and Failure Rates

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

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

The failure rates may appear high, but that's typical for short-term patterns like the inverted 3L-R. The highest failures occur in a bull market: 46% fail to drop at least 5%. The average drop is just 6%.

Inverted 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 drop.

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

The best performance of the measure rule occurs in a bear market, with 53% of patterns reaching their target.

Inverted 3L-R Trading Performance

Table 3 shows the performance based on 22,203 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 Inverted 3L-R Performance Statistics. This test sold short 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 below the bottom of the pattern as the entry price.

A position was covered if the stock dropped at least 7% below the entry price. Again, if the opening price was lower than the target price, I used the open otherwise I used the target price. A stop was placed 7% above the entry price.

For example, in a bull market, the net loss was $72.32 for all trades. The method won 44% of the time and there were 7,538 winning trades. The average gain of winning trades was $744.42.

Fifty-six percent, or 9,757 trades were losers. They lost an average of $703.31.

The average hold time was 25 calendar days.

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

Inverted 3L-R Trading Performance With Pattern Stop

Table 4 shows the results of 22,246 trades, but this time, I used a penny above the top of the inverted 3L-R pattern as a stop instead of a 7% stop.

For example, in a bull market the net loss was $22.17 for all trades. The method won 34% of the time and there were 5,903 winning trades. The average gain of winning trades was $722.89.

Sixty-six percent, or 11,433 trades were losers. They lost an average of $406.85.

The average hold time was 13 calendar days.

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

Inverted 3L-R Trading Example

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

The Inverted 3L-R looks like the inset with three higher highs followed by a low below the first low in the inverted 3L-R.

The four bar pattern ends the day before A. Sell short at the open at A, which is at a price of $91.92. The target is 7% below this, or $85.49.

The stock drops and hits the sell target as shown in the chart, at B.

A stop is placed 7% above the open, or 98.35 (not shown).

If the pattern stop method were used, the red line at C, which is a penny above the top of the inverted 3L-R, would serve as the stop location.

Inverted 3L-R: Target Exit, Stock Performance

In the discussion that follows, I use twice the height of the inverted 3L-R (added to the top of the 3LRi) 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 inverted 3L-R 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 inverted 3L-R helps to limit losses, in theory. In this case, the stock breaks out upward and then declines, almost touching the stop loss order set a penny below the bottom of the pattern.

However, the stock rebounds and rises to meet the sale target, shown.

Testing

As explained in the example above, I used a target exit placed twice the height of the pattern above the top of inverted 3L-R. 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 inverted 3L-R pattern show that it doesn't beat the benchmark. Don't trade this pattern in a stock bull market (that is, after an upward breakout in a stock).

Inverted 3L-R: Target Exit, ETF Performance

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

The inverted 3L-R 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 reached the target.

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 inverted 3L-R and the benchmark suggest this pattern isn't worth trading in ETFs.

Inverted 3L-R: Target Exit, Crypto Performance

This is an example trade in the cryptocurrency ATOM-USD on the daily scale. I highlight the inverted 3L-R 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 but was stopped out in mid June.

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 inverted 3L-R pattern. Don't trade crypto using the inverted 3L-R pattern. Note: The $31.81 gain in a downtrend is not a typo.

-- 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.
• 3L-R

Q: What do men and beer have in common? A: They are both empty from the neck up.