In the Strat patterns, When a 3 outside bar is followed by an inside bar, and then a 2 directional bar breaks inside a candle in the same direction as the previous 3 outside bar candlesticks, then a 3-1-2 continuation pattern forms. It shows that the prior trend will continue.
Based on the trend, the 3-1-2 continuation pattern has been categorized into two types:
- Bullish 3-1-2 continuation pattern
- Bearish 3-1-2 continuation pattern
In this lesson, I will also explain the psychology behind the formation of this continuation pattern with examples, so make sure to read the full article without skipping any step.
Bullish 3-1-2 continuation pattern
When a 3U or 3 UP candlestick is followed by an inside bar (which represents consolidation) and a 2U candlestick forms, breaking the high of the inside bar, then a Bullish 3-1-2 trend continuation pattern occurs on the chart. This means that the prior bullish trend will continue. So, if you are holding a bullish trade, you should keep on holding until any other reversal signal to get maximum profit from the market.
It’s the best entry signal on the lower timeframes.
Here are the few steps that you should follow to identify the bullish 3-1-2 pattern accurately:
- First, identify a bullish trend in the form of higher highs and higher lows. You should remember that this pattern must form within the prevailing bullish trend. It should not form at the reversal spots like the resistance zone or major key level.
- Find a bullish 3U candlestick fully engulfing the previous candlestick.
- Then, an inside bar will form, or scenario 1 will form.
- Wait for a breakout of the inside bar in the bullish direction only, which results in the formation of a 2U directional bar.
Kindly remember that the price should not break the low of the inside bar; otherwise, this pattern will become invalid.
In a 3-1-2 strat pattern, we will open a buy trade at the break of the high of the inside bar, and the first target level will be at the high of the last Outside or 3U candlestick.
Bearish 3-1-2 continuation pattern
When a 3D or 3 down candlestick is followed by an inside bar, and a 2D candlestick breaks the low of the inside bar, then a 3-1-2 bearish trend continuation pattern occurs on the chart. This means that the prior bearish trend will continue in the market.
If you are holding a sell trade and you find this pattern, then you should still keep holding that trade until any other reversal signal is signalled to maximize the profit potential.
Here are the steps to identify a 3-1-2 bearish continuation pattern:
- First, a bearish trend in the form of lower lows and lower highs is found.
- Then, identify a 3D candlestick or bearish engulfing during the downtrend.
- An inside bar candlestick will form after the 3D bar, showing an indecision phase in the market.
- Then, a 2D candlestick will break the low of the inside bar, showing the signal of trend continuation.
Analyze the image below for a better understanding of this pattern. In 3-1-2, the entry point is after the break of the low of the inside bar.
The psychology behind the 3-1-2 pattern
In strat, the scenario 3 is a signal of major market decisions. When the price expands, then it means market makers are going to make a major decision, and then the price will take a clear direction. So scenario 3 confirms that from this point, the market will take a clear direction.
However, the formation of the inside bar after scenario 3 confirms that market makers are now in the indecision phase. The market is consolidating to a single point, and a breakout is near.
Then, the break of high/low confirms that either a trend reversal will happen or the prior trend will continue. However we can also increase the probability of these signals by confluence of location. For example, a 3-1-2 continuation pattern should form within the prevailing trend; however, a 3-1-2 reversal pattern should form at support/resistance zones.
The above explanation is the activity of traders behind the chart during the formation of the 3-1-2 pattern. Knowing this will help you make good decisions in live trading.
Examples
Here are Examples of 3-1-2 Continuation:
The bottom line
The 3-1-2 continuation is an important strat pattern that helps traders in
- Alignment of higher timeframe trend timeline
- to open a trade
- for holding a trade to maximize the profit potential
You should backtest this pattern and then analyze and filter out the best ones. You should also check the performance of this pattern in different locations (within a trend or at support/resistance zones).
If you have any questions regarding strat patterns, then don’t forget to comment below.