1

I watched a video that describes the "3 bar play" day trading pattern, but the presentation style makes me think that it is a scam or, perhaps, bad advice.

I don't know why someone would promote such a method in this way for no obvious benefit, but is the "3 bar play" a recognised or commonly known pattern for use on the stock market?

The pattern is described as an unusually long candle body, followed by one or two resting candle bodies, followed by a third/fourth long body. The entry would be made after the signal candle of the 3rd (or 4th) candle.

  • 3
    Describe the play here. – user71981 Jun 18 '19 at 11:11
  • 1
    I did, in the post. It's in italics. – Matt W Jun 18 '19 at 11:18
  • 6
    @JanDoggen - I’ve never used candlestick patterns and have no idea if the question contains sufficient information to be useful (to describe what the trading trigger is). Either way, I’m not a fan of questions that link to a video that requires 30+ minutes of my attention to fully ‘get’ the question. – JTP - Apologise to Monica Jun 18 '19 at 21:02
  • 2
    @JanDoggen - I'm abstaining here. The topic itself is one I am ignorant of, and for the fact that 4 people seem to have presented answers (albeit, addressing a higher level issue, not the specific trade involved) to the question. I'll accept the OP's claim that the last paragraph suffices. – JTP - Apologise to Monica Jun 19 '19 at 11:29
  • 2
    I removed the possible spam link. I like that this question gives us an opportunity to educate people about random internet videos, but I don't want to send more advertising revenue to the maker of this video. – NL - Apologize to Monica Jun 19 '19 at 14:11
-1

Introductory Remarks: Challenging Community Perspective on Daytrading Patterns

Let me first address this example from Wikipedia's "Illusion of validity" that's been cited here:

Comparing the results of 25 wealth advisers over an eight-year period, Kahneman found that none of them stood out consistently as better or worse than the others. "The results," as he put it, "resembled what you would expect from a dice-rolling contest, not a game of skill." Yet at the firm for which all these advisers worked, no one seemed to be aware of this: "The advisers themselves felt they were competent professionals performing a task that was difficult but not impossible, and their superiors agreed." Kahneman informed the firm's directors that they were "rewarding luck as if it were skill." The directors believed this, yet "life in the firm went on just as before." The directors clung to the "illusion of skill," as did the advisers themselves.

This example only serves as a valid illustration that an entire industry is filled with clowns who would serve their company no better than monkeys if:

  1. Actual dice-rolling yields similar if not identical results (even a 0.1% gain on a 100mil portfolio buys me a house),
  2. The main point of the job is to be good at capital allocation. What about other skills that might be required and substantially complex? Think in terms of negotiating, consistent reporting, pitching, attracting new clients, etc., which are not represented by capital allocation decisions, and
  3. The strategists aren't actually purposefully trying to simulate rolling dice as maybe their intent is to diversify ad nauseam to simply hit their risk target. That way, they simply chase the market-based ROI as consistently as possible, which is entirely the point of many hedge funds.

TL;DR: Just because you're not getting superior returns to "rolling dice" doesn't mean you're a bad wealth manager. In fact, admitting you're no Warren Buffet and instead are going to diversify your funds in such a way that you hit market returns may be a very profitable strategy for a hedge fund or similar business models.


3-Bar Play: Sense and Nonsense

Now, let's actually discuss the main topic, which is the 3-bar play. The best descriptor of the 3-bar play is Jared from Live Traders. He did a 2-hour video on letting his viewers judge 3-bar set-ups and explained the dozens of reasons why this is not enough in its own right to base a trade off of. For him, it's a strong initial reason to take a deeper look into the stock. You need to consider volatility, trading volume, previously established support and resistance levels, and understand the strength of the set-up in its own right based on what the bars look like. And, any half-decent trader will ALWAYS tell you that you must backtest your strategies and hand-pick them (rather than testing hundreds algorithmically and being subject to obvious biases). So, if it doesn't work, it will never get past that stage.

Now, to give an example of scum who misinform the public and don't mention any of the above caveats: Wait, that's not a 3-bar set-up at all! Just in the header this guy missed out on a couple of things: 1. 3-bar plays are not suitable for beginners, because of the sheer amount of additional inquiry that is required to understand when the set-up can be used for a trade, and when it can't. 2. The initial bar should be unusually long to indicate a very strong potential move in the direction of that bar. The bars after should serve as confirmation that we're likely headed in this direction.

The profitability of the strategy comes from the combination of being able to set relatively tight stop-losses and loose take-profits, resulting in a favorable risk-reward ratio, as well as being able to adjust the expected win rate by being stricter or looser when considering the criteria mentioned before.

The bad rep of the strategy, general short-term trading strategies, and trading educators comes from clowns such as the one in the picture who wouldn't think of doing a lecture on BAD set-ups and showing his audience they are not yet capable of trading the pattern he's explaining because they need to take into account additional factors.

As I've tried to demonstrate, the question is not if the pattern or educators are good or bad. It's about how you use it in conjunction with other indicators, understanding which educators are how knowledgeable and transparent on given subjects, and understanding the fundamentals on which the patterns and general daytrading are based. You're not going to build a house using just a hammer, and you're not going to have a fun time building one without it. We all need a toolbox, and 3-bar plays should be a sensible addition to that toolbox, not a hail-mary to take every trade that resembles it.


Closing Remarks: Challenging Community Perspective on Daytrading

Fundamentally, the reason that short-term trading is potentially profitable is because Warren Buffet won't - and can't - give a damn about any of this. Daytrading and similar strategies only work until the volume required to push 2% of your account size exceeds what you can put into stocks that are volatile enough to pass for daytrading. It becomes more profitable to identify good management, a good business model, a discounted price, which is what Berkshire does, has done, and always will do.

But, and that's my point, these two extremes of the investing spectrum can coexist, and clowns in either category do not prove anyone's point.

12

As pointed out by Daniel Kahneman in his book, frequent stock trading is anything but Illusion of validity.

Comparing the results of 25 wealth advisers over an eight-year period, Kahneman found that none of them stood out consistently as better or worse than the others. "The results," as he put it, "resembled what you would expect from a dice-rolling contest, not a game of skill." Yet at the firm for which all these advisers worked, no one seemed to be aware of this: "The advisers themselves felt they were competent professionals performing a task that was difficult but not impossible, and their superiors agreed." Kahneman informed the firm's directors that they were "rewarding luck as if it were skill." The directors believed this, yet "life in the firm went on just as before." The directors clung to the "illusion of skill," as did the advisers themselves.

Trading website and stockbroker invented tons of daily trading tools (e.g. like the candlestick). But if one willing to spend time to consolidate thousands of trading news, one will notice those broker will tell a different story for a similar pattern.

It is clear that financial tools like 3 bar play is just made use of human cognitive weakness by listening to stories. In addition, the fund manager (or pump and dump scam artist) needs such tools to convince their client/victims, which their firm is not siphoning client investment from the trade (many fund manager actually affiliated with parent brokers firms that take a cut of trading commissions).

Walls street simply thank god for that majority unwilling to spend their time to read Thinking, Fast and Slow. Otherwise, the whole stock market will be slow and stale and dominate by slow investment funds like Vanguard, Berkshire.

  • 3
    Absolutely. The biggest gambling casino in the world is not in Vegas, it's online, and it's called stock exchange. – Aganju Jun 18 '19 at 8:54
  • 1
    This,s, with all respect, idiotic. Those who can not make money, turn into wealth advising. I know multiple people that have a very good life over years from trading. The existence of prop trading companies is a proof that yes, you CAN ,make money, consistently. Only, obviously, you do not necessarily talk about it and you are not looking for money, you know. You have enough, very fast. – TomTom Jun 18 '19 at 16:34
  • @Aganju So sad ;-) – mootmoot Jun 18 '19 at 17:15
  • 1
    @TomTom And you can bet there are many people defending such "industry". – mootmoot Jun 18 '19 at 17:16
  • 1
    @mootmoot Sadly yes. Sadly people going for this have no chance. Period. Not because the companies are scam, but (first!) because they can not handle trading from a mental setup. That being said, most shops ALSO are not serious. But this is like all those "make a model career" agencies. – TomTom Jun 18 '19 at 19:12
5

There's an entire cottage industry built around the concept that you can successfully trade the market if you follow pattern recognition (flags, pennants, head and shoulders, engulfing reversals, gaps, double and triple bottoms, cup and handle, ad nauseum... and even this 3 bar play). Software, newsletter subscriptions, managed money, etc.

Given the number of stocks available for trading and the number of 3 and 4 minute periods that occur in each one during the course of a trading day, the set up pattern could possibly occur 1000's of times a day. The question is, should you decide to accept this mission, is how many of those hypothetical 1000's of occurrences actually succeed rather than result in a losing whipsaw? My guess is that like most purveyors, the video's author cherry picked some fantabulous results to demonstrate the ease of doing this.

Your video was TLDNR and I don't know squat about the author. But I'd ask you this: If this pattern is the road to riches, why his he hyping it in a YouTube video rather than trading the sh*t out of it and laughing all the way to the bank? Jesse Livermore, Richard Dennis, Paul Tudor Jones and what's his name in the video ??? Uh-huh.

  • As has been mentioned in another answer, given my short description of the pattern/play, would you call it good 'advice' for an aspiring trader? – Matt W Jun 18 '19 at 15:13
  • 2
    Good advice to an aspiring trader is to find an edge, understand the strengths and weakness of it and then trade that edge (with disciplined risk management) until it no longer works. No one is going to hand it to you for free on a silver platter. Write a program to analyze this pattern. Don't know how to program? There are lots of software programs out there than let you create algorithms for back testing. Don't want to learn that? Take a trial subscription with whoever sells this 3 bar meal plan. Odds are, you'll be financing the guy's annuity ($ubscription$). – Bob Baerker Jun 18 '19 at 15:28
  • One wrong thing: There is a whole industry built around the illusion that anyone can do so successfully. It IS possible to makea very good life from this - but: it is a rare talent, and while training helps, most people will never manage the psychological game. And those people are STILL being hunted by those companies. As an associate of mine says - who lives for years from trading, btw. - in his time as a broker he told people that he was selling dreams, and that is true. Most people just can not makje it. – TomTom Jun 18 '19 at 16:36
  • 4
    @TomTom Some people can also make a living at the craps tables in Vegas... not because they are actually that skilled. – Michael Mar 1 '20 at 1:05
3

The three bar play isn't a scam.

Unless they say you must do your trades through them, or that they will sell you a tool that allow you to take advantage of this pattern, or you have to take their training course to learn the method, then they have no ability to making money off your investments.

Without a source of income from you and others like you, there is no scam.

Now is it good advice?...that is a different question.

  • 2
    I agree 100% with your answer but would add another point to your second paragraph - reputation gain (via creating the illusion that they're an expert) and then advertising as a potential source of "income" for the scammer. These days you don't need to actually sell someone something to make income off them, you just need them to consistently click on your ad-heavy website/email/videos. Making a convincing pitch under the guise of "I'm not even trying to sell you anything" is a great way to do that. – dwizum Jun 18 '19 at 14:53
  • Is it good advice? Should I modify my post in that direction? – Matt W Jun 18 '19 at 15:12
  • 1
    No. Don't change your question. If you want to know if it is good advice ask a new question. Also look for other questions on this site that discuss these types of patterns. – mhoran_psprep Jun 18 '19 at 16:18
2

I don't know why someone would promote such a method in this way for no obvious benefit

The video is 30 minutes long. This is an obvious ploy to get advertising revenue. It doesn't matter to the author whether the strategy works or not. Will it get shared on social media by people who like the idea of getting rich quick? If so that translates into real money.

-4

From my experience, most trading strategies out there work. The problem with them is they never explain all the angles such as what if you lose and what if you lose again and again. These are the things you need to figure out and often when one loses repetitively, you start to change the strategy. This is called the circle of death. Don't change the strategy. Stick with it. You need to feel confident about it.

So to answer you question, the strategy is not a scam (correct me if I am wrong). Please start every strategy on a practice account for a month or two and understand it fully.

Every strategy will have losses. The trick is to not get emotional about it and that is difficult.

  • 3
    "most trading strategy that is out there works" If, as mootmoot's answer claims, the "best" strategists (presumably using the "best" strategies) are hard to tell from dice-rolling, there must be plenty of strategies that flat-out don't work (e.g. "buy high, sell low"). – TripeHound Jun 18 '19 at 8:45
  • 2
    From years in the industry AS a trader that earns enough to pay people to actually write strategies, and from about 2 years trying to backtest and implement published things - pretty much everything people talk about DOES NOT WORK. This does not mean that you can not make money trading, but those who can do not pack up their work into a nice cheap course and tell people exactly how to trade. Though they may write books on market structure ;) – TomTom Jun 18 '19 at 19:13

Not the answer you're looking for? Browse other questions tagged or ask your own question.