1-3 Reversal Patterns

When an inside bar candlestick is followed by an outside bar, a trend reversal pattern, which is a 1-3 reversal pattern in strat trading, forms on the chart. This pattern is also known as an engulfing pattern.

The 1-3 pattern shows that price is expanding, making higher highs and lower lows. It usually forms before a major trend reversal. In strat patterns, the 1-3 pattern is very important in a trade entry and exit. So, I recommend that you learn this pattern from the basics so you can make wise decisions in live trading. 

Based on the trend reversal, the 1-3 pattern is categorized into two types:

1. Bullish 1-3 reversal pattern 
2. Bearish 1-3 reversal pattern

In this lesson, II will explain the 1-3 patterns in complete detail with examples, so please read the full article without skipping any step. 

Bearish 1-3 reversal pattern 

When an inside bar pattern is followed by a bearish outside bar at the resistance or supply zone, then a 1-3 bearish reversal forms on the chart. it is also the result of a failed bullish trend continuation pattern. After the inside bar, the price will first form a 2U candlestick, breaking the high of the inside bar, but then it fails and reverses in the opposite direction, which results in a break of the low of the inside bar and, in the end, a bearish outside bar forms. This pattern shows that the bullish trend has been changed to a bearish trend. 

To accurately identify 1-3 bearish reversals, follow the following steps:

• Find a resistance or supply zone. you can also identify key resistance levels on the chart. 
• Then, identify an inside bar at the key resistance level. This will show that the price is in the decision phase at that resistance level. 
• After an inside bar is formed, the price fully engulfs it, making a higher high and lower low. This pattern shows that bears are stronger and sellers are ready to initiate a bearish trend. 

1-3 is a very simplistic pattern, but the most important aspect is its location on the chart. You should not trade it within a ranging market. Also, if you are holding a trade, you should be cautious after the formation of a 1-3 pattern because it always gives rise to big trend reversals in the market. 

Bullish 1-3 reversal pattern 

When an inside bar is followed by a bullish outside bar at the bottom of the trend or at the support/demand zone, a 1-3 bullish trend reversal pattern forms, this pattern shows that the market trend has shifted from sellers to buyers. 

In live trading, the price will first break the low of the inside bar, Predicting a bearish trend continuation, but in the next instance, the price will reverse. Then, it will break the inside bar’s high, making a 3 Bullish outside bar candlestick. This phenomenon shows a failed trend continuation. but as I always said, location is very important. Traders should not sell in the support zone; they should buy from the support zone. The addition of support or resistance will help you to filter many false breakouts or false patterns.

Here are the steps to accurately identify 1-3 bullish reversals. 

• Find a support or demand zone on the chart. 
• Identify an inside bar formation at the support or resistance zone. 
• A bullish 3 outside bar candlestick must fully engulf the inside bar. 

This pattern is also known as the bullish engulfing pattern. 

The psychology behind the 1-3 reversal pattern 

In trading, the big players always want to eliminate the retail traders before making a big trend reversal. They do this through price expansion. When price expands, it forms higher highs and lower lows. Each successive wave will be larger than the previous wave. This price expansion will trap and eliminate a number of retail traders, generating enough liquidity for big players to make a trend reversal. 

The 1-3 pattern is a form of price expansion. That’s why, after forming a 1-3 pattern at key levels, a big trend reversal occurs on the chart. 

You should also remember that a trend reversal is confirmed only after the break of the outside bar. 

For example, if you are holding a buy trade and a bearish 1-3 form, you should not immediately close the buy trade. Instead, you should wait for the breakout of the low of the outside bar, which will confirm the trend reversal. Otherwise, you should keep on holding a profitable trade because profit is in holding a trade longer. 

Examples

Here are few examples:

The bottom line

The strat patterns strategy is made up of three major market scenarios, and the 1-3 pattern is one of them. It helps in trade entry, exit, and partial take profit. That’s why I highly recommend you backtest this pattern as much as you can. Also, check the winning probability in different price conditions, like trending or ranging. 

If you have any questions regarding the 1-3 patterns, please comment below.