The old ways are the best ways
At the beginning of 21st century, after Linda Raschke’s best-seller “Street Smarts: High Probability Short-Term Trading Strategies” was published, many traders were simply obsessed with the pattern Three little Indians. There were many discussions about the time frames it could be applied to and about whether it would be efficient when applied to the exotic currencies. The most enthusiastic champions would assert that traders didn’t need anything else at all: “just open a position to sell and wait till a signal to buy is produced”. The market was overwhelmed with the universal love to this pattern and the traders forgot for some reason that actually it had been discovered a few decades earlier.
In candlestick analysis, there’s a pattern called “Three rivers”. It includes three subsequent lows formed in a falling market. Another reversal candlestick pattern needs to form in the area of the last extremum, be it bearish absorption, harami, or any other pattern.
For example, the Three rivers pattern appeared in the daily chart of EUR/CAD in October 2019, with a bearish absorption found in the area of the last low.
Three rivers in EUR/USD’s daily chart
Unlike Three little Indians, this pattern doesn’t demand that the quotes return to the high of the bar called “the second Indian”. To open a long position, placing a pending order at the high of the second candlestick in the bullish absorption pattern will be enough. An important resistance level which may become support later is very likely to be located there. The retracement from this level allowed building up long positions in the example of EUR/CAD .
Strategy of work under Three rivers pattern
A protective stop order should be placed at the low of the fluctuation. To close the long position, one can use a 4 to 1 or a 5 to 1 profit factor. It means a potential profit must be 4-5 times higher than potential losses. In particular, a long position in EUR/CAD would have yielded nearly 700 points in 2 months from October to December, an equivalent of 4.7%.
The opposite pattern, which has a lot in common with Three little Indians too, is called Three mountains. It’s when a few subsequent growing maximums take place in a bullish market. A reversal candlestick pattern needs to form in the area of the last of them. For example, the growth of GBP/USD in January-March 2019 turned quickly into the fall of quotes once the Three mountains pattern occurred in the daily chart. An inside candlestick showed up at the third extremum. A bearish harami would have been a perfect option, but we know very well that price gaps are a rare notion in Forex.
Three mountains in the GBP/USD daily chart
A pending order to sell was supposed to be placed at the low of the inside candlestick. Next, a trader had opportunities to build up short positions. To close the short positions, a 5 to 1 profit factor was used, but if the trader hadn’t been greedy, the profit would have been 6 times higher.
Strategy of work under Three mountains pattern
In my opinion, the fact that the Three rivers and the Three mountains patterns appeared much earlier than Three little Indians doesn’t belittle Linda Raschke’s merits. Her book reminded traders of that efficient pattern and breathed new life into it. What’s more, we all know that the old ways are the best ways.
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Price chart of GBPUSD in real time mode
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