3-1-2 Reversal Patterns

When a 3 Outside bar is followed by an inside bar, and a directional bar forms, breaking the inside bar in the opposite direction of the previous Outside bar, then a 3-1-2 reversal pattern occurs on the chart. 

Based on the direction of trend reversal, This pattern has been categorized into two types:

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

In this lesson, I will explain the 3-1-2 reversal in detail with examples.

Bullish 3-1-2 reversal 

When a 3D or 3 down outside bar is followed by an inside bar, and a 2U directional bar forms, breaking the high of the inside bar, then a Bullish 3-1-2 reversal strat pattern forms on the chart. This pattern will turn the bearish trend into a bullish one. 

A 3-1-2 bullish reversal pattern will form mostly at the demand zone or support zone. If this pattern forms within a range, then the probability of trend reversal will be low. This trend reversal pattern also offers very high-risk reward trades.

Here are a few steps to follow to get a high probability 3-1-2 bullish pattern:

• First, identify a bearish trend in the form of lower lows and lower highs.
• A 3D outside bar should form at the end of a downtrend. This is followed by an inside bar candlestick showing market indecision. 
• Then, a 2U candlestick will form, breaking the high of the inside candlestick. 

These are the simple criteria to identify a Bullish 3-1-2 reversal pattern. In this pattern, the first target of the market is to break the high of the previous 3D outside bar. 

Bearish 3-1-2 reversal pattern 

When a 3U outside bar is followed by an inside bar and a 2D directional bar forms, breaking the low of the inside bar, then a bearish 3-1-2 reversal occurs on the candlestick chart. This pattern turns the prior bullish trend into a bearish one. 

The probability of bearish trend reversal will be higher when this pattern forms at a resistance or supply zone. So we should trade it with a confluence. However, in the upcoming lessons, I will also explain the higher timeframe trend timeline that’s the best confluence to get high probability trades in the strat patterns strategy. 

Here are a few steps that you should follow to identify a 3-1-2 bearish reversal:

• First, a bullish trend in the form of higher highs and higher lows is found. 
• Identify a 3U outside bar followed by an inside bar. The inside bar shows that the price is consolidating inward, and the market is deciding the future direction. 
• Then, a 2D directional bar will form, breaking the low of the inside bar. This will confirm the formation of a 3-1-2 bearish reversal.

Here, the first target of the price will be the low of the 3U candlestick, and trade entry will be at the inside bar breakout.

Examples

Here are few examples to learn more about 3-1-2 reversal:

The psychology behind the 3-1-2 reversal pattern 

Psychology means knowing the activity of traders behind the candlestick chart. It helps traders to make the best decisions in live trading. 

In trading, when the market trend changes, it always makes some patterns, and 3-1-2 is one of those patterns. These patterns help retail traders determine trend reversals. 

Let me explain the 3-1-2 reversal. As we already know, the outside bar shows price expansion, and it forms mostly at major trend reversals. So, after the outside bar, the market makes an inside bar, showing that the price is now deciding its direction, either to reverse or to keep the prior trend. Then, the breakout of the inside bar decides the future direction of the market. 

It is obvious that market makers make false breakouts to keep the retail traders out, but when we follow a high probability pattern with confluence, then the chances of loss will decrease. 

The bottom line

3-1-2 reversal is the best pattern to capture long trends and high-risk reward trades. I also like this pattern for trade entry. 

I highly recommend that traders backtest this pattern at least 25 times and then analyze the attributes of winning and losing patterns. so you’ll be able to trade live with confidence. 

If you have any questions regarding the strat patterns, then remember to comment below. 

Thanks