The Three Indians pattern is one of the most straightforward graphical analysis patterns, and even if you have never heard of it, I am sure you have seen it on charts before. Sometimes, traders also call it the third-touch trading strategy. Although this pattern is very simple, it requires some experience and several signal confirmations to protect your capital from wrong decisions.
Structure of the Three Indians
The structure of this pattern is quite simple. It’s easy to find on a chart. The figure consists of three large peaks. If you notice the Three Indians, you only have to correctly mark the support line and wait for an entry signal.
Let’s take a look at the picture below to make it more clear.
Three Indians Pattern
On an uptrend, we see three peaks. We will enter the trade before the formation of the third top. The scheme of actions is simple:
- When the second peak finishes forming, you need to draw a line at two lows. This will be our support level.
- When the chart bounces off the price level for the third time, we get a buy signal.
- Sometimes the market keeps returning to the price level. Then you can open a buy trade on every new bounce from the support line.
Some traders enter the trade on the second touch. This is an incorrect and very risky approach. We need two touches to plot the price level. Only after the third bounce, we can accurately determine the direction of the trend with minimal risks for ourselves.
Three Indians on a Downtrend
Since the pattern is universal, it works great in a bearish market as well. Your actions remain essentially the same:
- We are waiting for the end of the formation of the second bottom and build a resistance line at two highs.
- We wait for the third bounce from the price level and open a sell trade.
- On subsequent rebounds, we continue to open short positions.
A Few More Helpful Tips
- The Three Indians give the most accurate signals on relatively high timeframes. The 4-hour and daily charts work best. Don’t rely on this pattern on too high or low timeframes.
- If you can draw a second line at the highs of the peaks or lows of the bottoms, then the figure can turn into a channel or even an ascending triangle.
- For a more accurate and faster determination of the moment of a bounce, you can use reversal candlestick patterns. This will give you a faster signal to open a trade.
- It is worth remembering that the market is highly unpredictable. Some traders prefer to wait for confirmation of the trend direction before entering a trade. As soon as the first candlestick is formed in the desired direction, you can safely enter the market.
- The Three Indians should only be traded in the direction of the main trend. Don't be tempted to trade against it. After the third bounce, the price may not reverse and continue moving in the trend direction. You shouldn't take risks and open a trade at random.
That's all you need to know about the Three Indians figure. Low-frequency traders don’t receive suitable trading signals too often. If you catch the Three Indians in the process of formation don’t miss the moment to enter the trade.