The 3 by 3 is a proprietary trading technical tool that I developed in the early 1990’s.
The purpose of the 3 by 3 is to find meaningful support and resistance for the current trading bar. It can be used on any timeframe chart —intraday, daily, weekly, monthly.
How It Works
The methodology is to first calculate the 3 bar average of the lows and the 3 bar average of the highs. Next calculate the average range of the last 3 bars. The range is simply the high minus the low for each of the bars. The 3 bar average range is the total of the 3 bars ranges divided by 3.
Of course the above calculations are done by your technical analysis software. The code would look something like:
MovingAvg (High , 3) – (Avg True Range (3) * 1)
MovingAvg (Low , 3) + (Avg True Range (3) * 1)
The 1-2-3 Entry
The 1-2-3 entry gives the trader a solid place in both time and price to buy support in an up trend and sell resistance in a down trend. First we need to define an uptrend and downtrend.
An up trend is characterized by several closes beyond 3 by 3 high, a market that is making new highs, and a pattern of higher highs and higher lows. A down trend is characterized by several closes beyond the 3 by 3 low, a market that is making new lows, and a pattern of lower lows and lower highs.
Once an up trend is established, look to enter on a test of a 3 by 3 low after a 2-3 bar pullback from the latest new swing high bar. Note that the new swing high bar means the market was still making new highs. This is when to use the 1-2-3 entry; after the new swing high bar.
Similarly once a down trend is established look to enter on a test of a 3 by 3 high after a 2-3 bar pullback from the latest new swing low bar. Note that the new swing low bar means the market was still making new lows. This is when to use the 1-2-3 entry; only directly after the new swing low bar.
Time Factor In The 1-2-3 Set Up
In counting the 1-2-3 set up for buys the Bar #1 is the latest new swing high bar. Bar #2 is the first retracement bar where obviously the high is below the high of the previous bar. Then Bar #3 is the bar where the 3 by 3 support can be first attempted on the long side.
In counting the 1-2-3 set up for sells the Bar #1 is the latest swing low bar. Bar #2 is the first retracement bar where obviously the low is above the low of the previous bar. Then Bar #3 is the bar where the 3 by 3 resistance can be first attempted on the short side.
Price Point In the 1-2-3 Set Up
Bar #3 is the first bar where entry can be attempted. Entry attempt will be at the 3 by 3. There is no guarantee of course that price will actually trade to the 3 by 3 point on Bar #3 and often times it will not.
If nothing done on Bar #3, then allow a one bar grace period and try the next bar to enter at the 3 by 3 point. If still nothing done after this bar, then wait for a fresh 1-2-3 set up. The pattern is finished if no entry is achieved by the grace bar.
A New Edge
The 3 X 3 can be used as part of a mechanical strategy or as a tool in the arsenal of indicators that are proven to provide a verifiable edge.
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