What is the Three-Bar Reversal?

The Three-Bar Reversal is a candlestick pattern made of three consecutive candles that signals a change in the current trend. It is simple to spot and ideal for beginners because it reflects basic market psychology: a strong push, hesitation, then the opposite side takes control.

How to Identify

Look for the pattern within an existing trend:

First candle: a large-bodied candle that follows the current trend (e.g., a strong red candle in a downtrend).

Second candle: a small-bodied candle that shows indecision and usually stays inside the range of the first candle.

Third candle: a large-bodied candle in the opposite direction, closing beyond the open of the first candle.

For a bullish reversal, price is falling; the first candle is strongly bearish, the second is a small doji or narrow candle, and the third is a strong bullish candle that closes above the open of the first candle.

A bearish reversal is the opposite: a strong bullish first candle, a hesitant second candle, and a strong bearish third candle that closes below the open of the first candle.

How to Trade

Once the pattern is complete, trade in the direction of the third candle:

Entry: Wait for the third candle to close. For a bullish pattern, buy at the close of the third candle or on a breakout above the pattern's high.

Stop-loss: Place it below the lowest low of the pattern. For a bearish pattern, place it above the highest high.

Target: Set your target at the nearest support/resistance level. Aim for at least a 1:2 risk-to-reward ratio.

To increase your odds, only trade in the direction of the larger trend. For example, if the long-term trend is up and a bullish three-bar reversal appears during a retracement, it is a stronger buy signal.

Real Example

Imagine EUR/USD on the H4 chart, after a 100-pip drop:

Bar 1: red candle falling 50 pips.

Bar 2: a small doji inside the range of Bar 1.

Bar 3: a green candle rallying 60 pips and closing above Bar 1's open.

You could buy immediately at the close of Bar 3, set a stop-loss below Bar 1's low, and target the previous swing high. If the rally continues, the trade is profitable.

Common Mistakes

Trading against the larger trend: Use this pattern to trade pullbacks, not to fight the main trend.

Skipping confirmation: Some traders enter after the second candle, but you must wait for the third candle to close.

Stop-loss too tight: Price may sweep your stop before moving in your favor, so place it at the extreme of the entire pattern.

Poor money management: No matter how good the setup, risking too much on a single trade can destroy your account.

Content is for reference only, not investment advice. Forex trading carries high risk.

Three-Bar Reversal: A Beginner's Setup

What is the Three-Bar Reversal?

How to Identify

How to Trade

Real Example

Common Mistakes

Save your learning progress