Bar Pattern - Keeping It Simple
Bar Pattern - Keeping It Simple
KEEPING IT simple
While software packages that provide the latest bells
and whistles are fine, they sometimes obscure the
benefits of a simple trading approach.
P
of great benefit to the trading public, in
that they give individual traders the abil-
ity to perform research and analysis pre- 1
eople often underestimate viously in the domain of financial insti-
the effectiveness of simple tutions.
trading methods, focusing However, this access to technology has
more on advanced tech- a downside. In some ways, it has fooled
niques — in essence, equating complexi- many traders into believing the more
ty with profitability. complicated a trading strategy is, the bet-
Part of the problem is our fascination ter its chances of success. This is not nec-
with technology. There are many soft- essarily the case. We will show that sim-
ple trading rules have real value and can
TABLE 1 DAILY BAR LABELS result in profitable systematic trading
approaches that are easy for all traders to
Bar number Description implement and execute.
0 Today
1 Yesterday Figure 1 shows a price pattern formed by
four consecutive daily bars. The bars are We are not concerned with all price
2 Two days ago numbered from 0 (the most recent bar) to 3 points (open, high, low, close) for each
(the most distant bar). The most recent bar bar: For bar 0, only the value of the high
3 Three days ago
is also referred to as “today,“ bar 1 as “yes- is important; for bars 1 and 2, only the
terday“ and so on, as shown in Table 1). lows; for bar 3, both the high and low.
Generic price
patterns —
patterns good for
trading everything
with a high
probability of
success —
Source: TradeStation by TradeStation Group
do not exist.
FIGURE 3 3L-R: TRADING DELL
The results of trading the 3L-R pattern on Dell using an 8-percent stop-loss The 3L-R pattern can be used to enter
and profit target. Results shown on a per-share basis. short-term trades. A new position is
placed at the open of the next trading
day following the confirmation of the
pattern. One of the advantages of this
type of pattern is that it can be described
in simple language. In this case:
Buy on the open if:
• yesterday’s low is lower than the
low of two days ago;
• the low of two days ago is less
than the low of three days ago;
• today’s high is greater than the
high of three days ago.
45
40
35
30
25
20
the better the chances of success. tern had a historical profitability of 74.14
percent for the period between January
1990 and April 2001. A total of 58 trades
However, simple trading rules can were executed; the pattern never pro-
duced more than three consecutive losing
trades and, at one point, had 13 straight
produce profitable systematic trading winners. Figure 3 shows the test results
for another stock, Dell Computer (DELL),
approaches that are easy to understand with the same 8-percent profit-target and
stop-loss levels. The profitability in this
case was nearly 69 percent.
and execute. Skeptics often question the robustness
of simple, pattern-based trading tech-
cent, and a stop-loss of the entry price the profitability of the basic pattern. niques during extended declining mar-
minus 7 percent. Note that other than risk-r eward kets. Figure 4 shows the 3L-R trades for
Figure 2 shows the historical test parameters, this kind of pattern has no the period between October 2000 and
results for the 3L-R pattern on Intel other elements that can be varied. This April 2001, when INTC declined more
(INTC), using profit target and stop-loss avoids “curve-fitting“ a system, a com- than 50 percent. The up arrows indicate
levels of 8 percent. The number of shares mon practice of tailoring trading rules to long entries; the down arrows indicate
traded, 100, is the same for all trades produce excellent results on past price exits.
because the object of the test is to study data. However, fitting leads to optimized Of the five trades made during this
T
period, three were winners and two los-
ers. Therefore, although market condi-
here are several ways to monitor price patterns that generate trad-
tions were highly adverse, the 3L-R pat-
ing signals for the open of the next trading day. For example, you
tern strategy made a net profit, proving
can use charting software and visually monitor the pattern forma-
this simple price pattern remained
tion, or use more sophisticated software to track daily prices and generate
viable in a down market. Table 2 shows
alerts when a trading model issues a signal for a new position.
the EasyLanguage code used to gener-
A simple method traders of all skill levels can use is a trading worksheet
ate the back-testing results for the trad-
on which each of the conditions in the pattern logic are listed and evaluat-
ing model based on the 3L-R pattern.
ed on a daily basis. An example of the worksheet for pattern 3L-R is shown
below.
On the top of the worksheet, the name of the pattern, the trade input
Figure 5 shows another simple price pat-
type and the last trading day are listed. The trading rules for the pattern are
tern. Again, the bars are labeled 0 for
included, with the conditions listed separately. On the right, the stock trad-
ed is listed along with the applicable profit target and stop-loss. The values
FIGURE 5 THE GAP-2H SETUP
required to evaluate each of the conditions in the pattern logic are also list-
ed. These values are used to test the validity of the conditions and the result
The GAP-2H pattern consists of
noted next to each condition — “yes” for valid and “no” for not valid.
three daily price bars.
In the example shown here, two of the conditions are not valid and one
is. Because all conditions must be valid for the pattern to generate a trade
0 signal, no trade is taken, which is noted at the bottom of the worksheet.
A separate worksheet must be used for each pattern and stock traded,
and it must be evaluated on a daily basis. Although this is a manual method
requiring extra effort, it has the advantage of helping you maintain contact
with the markets while imposing a daily routine that enforces trading disci-
1 pline.
Using a worksheet to track and evaluate price patterns can aid your trading.
Pattern: 3L-R
Trade input: Open of tomorrow Date: 4/12/2001
Trading rule: Stock: INTC
If low of yesterday is less than low of Target: 8%
2 days ago and low of 2 days ago is Stop: 8%
less than low of 3 days ago and high
of today is greater than high of 3 days
ago then buy tomorrow on the open. Values:
Condition Valid?
2 Low of yesterday: 27.17
Low of yesterday less No Low of 2 days ago: 23.35
than low of 2 days ago
Low of 3 days ago: 22.25
Low of 2 days ago less No High of today: 28.51
than low of 3 days ago
High of 3 days ago: 24.20
High of today greater Yes
than high of 3 days ago
Result: No position
{*****************************************************
Description : 3L-R Pattern Entry Signal
Developed By : Michael Harris, Tradingpatterns.com today’s bar, 1 for yesterday’s bar and 2
*****************************************************} for the bar two days ago. The pattern
contains a price gap from the high of bar
if l[1] < l[2] and l[2] < l[3] and h[0] > h[3] then 2 to the low of bar 1. In addition, the low
buy (“3L-R”) next bar on the open; and high of bar 0 are greater than the low
and high of bar 1, respectively.
{***************************************************** This price pattern is named “GAP-
Description : 3L-R Pattern Long Exit Signal 2H,“ indicating a price gap followed by
Developed By : Michael Harris, Tradingpatterns.com two higher highs. It can be used to take
Comments: ptarget and stopl are in percentage terms long positions in select stocks.
*****************************************************} Buy on the open if:
variables: profitprice(0), stopprice(0); • the high of two days ago is higher
input: ptarget(8), stopl(8); than the low of two days ago;
• yesterday’s low is higher than
profitprice = entryprice*(1+ptarget/100); the high of two days ago;
stopprice = entryprice*(1-stopl/100); • today’s low is greater than
yesterday’s low;
if marketposition =1 then begin • yesterday’s high is greater than
exitlong (“3L-R Exit”) at profitprice limit; today’s low;
exitlong (“3L-R Stop”) at stopprice stop; • today’s high is greater than
end; yesterday’s high.
profitprice = entryprice*(1+ptarget/100);
stopprice = entryprice*(1-stopl/100);
Additional research
▼ Stock Trading Techniques
Based on Price Patterns
by Michael Harris,
Traders Press Inc., 2001.
▼ Short-term Trading
with Price Patterns
by Michael Harris,
Traders Press Inc., 2000.
NOTE: What you have just read has been presented solely for informational or educational purposes. No
investment or trading advice or strategy of any kind is being offered, recommended or endorsed by the author or
by TradeStation Technologies or any of its affiliates, agents or employees.