3-2-2 Reversal Pattern

When an outside bar is followed by a directional bar of the same colour and then an opposite colour directional bar forms, breaking the previous directional bar, a 3-2-2 trend reversal pattern forms in the strat trading. This pattern is a combination of three candlesticks

1. Outside bar
2. Directional bar
3. Directional bar

Based on the trend reversal, this pattern is divided into two types:

• 3-2-2 Bullish Trend Reversal 
• 3-2-2 Bearish Trend Reversal 

I will explain these three candlestick trend reversal patterns in detail in this lesson. I will also elaborate on you with examples so you can easily trade and understand this pattern. 

3-2-2 Bullish trend Reversal 

When a 3 outside bar is followed by a 2D or bearish directional bar, then a 2U or bullish directional bar forms, breaking the high of the previous 2D candlestick, and then a 3-2-2 bullish reversal pattern occurs on the chart. This pattern will turn the previous trend into a bullish one. 

To identify this bullish 3-2-2 pattern accurately, you must follow the following rules: 

1. First, identify a 3 outside bar or a bearish engulfing pattern. The colour of the inside candle does not matter here. 
2. Then, a 2D directional bar will form, making a lower low. It should be in red. It can be a pin bar showing rejection from a support zone. 
3. after 2D candlestick, a 2U candlestick will form breaking the high of 2D candlestick. 
4. The 2U directional bar should not break below the low of 2D; instead, it should break the high of 2D candlestick. 
5. High of 3D candlestick will act as first target level in the strat trading. 

Always remember that the formation of highs and lows is more important than the candlestick colours. 

3-2-2 Bearish Reversal Pattern 

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

Here are the few steps that a trader must follow to find this pattern accurately:

1. Find a 3 outside bar pattern. It will form at the top of a trend reversal. 
2. Then, a 2U candlestick will form, making a higher high. It can also be a pin bar candlestick showing the price rejection from a certain resistance level. 
3. After the 2U candlestick, a 2D candlestick will form, breaking the low of the previous 2U candlestick. 
4. The 2D candlestick must not break the high of the previous 2U bar; instead, it should break the low, making a lower low. 
5. A low of 3 outside bars will act as the first target level for the price. 

Analyze the image below for a better understanding. 

The psychology behind the 3-2-2 reversal pattern 

In the strat trading, the outside bar pattern is symbol of major trend reversal in the market. Before picking a clear trend, the market always expands its range, aggregating in one direction. So, the outside bar is the alert symbol for a trend reversal in the market. 

After the outside bar, a directional bar acts as another high for expansion, but it also acts as a fakeout to eliminate most of the retail traders from the market. 

When the price breaks the high/low of the previous directional bar, then it confirms that it has broken the significant barrier or support/resistance level that was on the way to trend reversal. Now, the market is ready to make a major trend reversal. 

This is the simple activity of traders behind that chart during the formation of a 3-2-2 reversal pattern. 

Example

Here are the few examples that you can analyse to master the 3-2-2 pattern.

The bottom line

3-2-2 is the high probability pattern to find a trend reversal. The break of the second candlestick 2 will act as an entry-level, and the high/low of the outside bar will act as the first target level. 

If we find this pattern on a daily timeframe, then we can open the intraday timeframes and trade in a bullish direction only from the price break to the target level. 

You should backtest this pattern on multiple timeframes and analyze the price patterns. 

Remember to comment below if you have any questions related to strat patterns. I will try my best to answer.