Automated Trading Strategy #86: The Three Bar Play & Other Legendary Continuation Strategies
The trend is our friend. We're Taking Profitability To The Next Level
Important: There is no guarantee that ATS strategies will have the same performance in the future. I use backtests and forward tests to compare historical strategy performance. Backtests are based on historical data, not real-time data so the results shared are hypothetical, not real. Forward tests are based on live data, however, they use a simulated account. Any success I have with live trading is untypical. Trading futures is extremely risky. If you do trade live, be prepared to lose your entire account. There are no guarantees that any performance you see here will continue in the future. The best way to trade is with a simulated account on live data. I recommend using ATS strategies in simulated trading until you/we find the holy grail of trade strategy. This material is for educational purposes only and should not be viewed as investment advice.
Before sharing a few of my favorite continuation strategies with you, I want to provide a quick update on the platform search.
The bad news is that I have yet to decide on the next platform. What I can tell you is that the goal is to find a platform that can efficiently interface with an LLM. Due to my limited knowledge in all things LLM, the biggest roadblock for me is 1) data transfer/API configurations and 2) developing the best prompts to act as a trigger between systems. I’ve found a few workarounds in the market that allow a novice to embed an LLM into workflow (ie. Lindy.AI), but I don’t think these applications will be necessary shortly, which is the good news. Things are moving so fast that I’m sure we’re going to see some very interesting developments in terms of LLM integration over the next six months. It’s just a matter of time before LLMs like Claude and OpenAI are able to carry out the code they create with external applications.
I’m churning out strategies at a very fast clip due to LLMs. I hope to create an Incubator portfolio within the next 30 days that is specifically for this next phase of strategies, but I’ve also run into a roadblock with Hurricane Helene. We’re down one week on the forward test and I still don’t have Wifi or cellular at my home office so my writing schedule is precarious. As remuneration for time lost, I’ve given all subscribers one month comped. Please let me know if you have not received it.
With that, let’s get into Strategies 86a, b, and c.
“The strongest bull markets I've been in are built on walls of worry.”
Cathie Wood, $60 billion (assets) ARK Invest
Most successful traders share the following three cycles: lose money, break-even, make money. Then you have those traders that knock it out of the park. They aren’t just traders, they are super-traders that have a highly profitable strategy.
I’ve made it to the minor “makes money” stage, but I never have BIG days and I’m trying to figure out why so I’ve been using LLMs to help analyze my manual trade performance to see if it can give insights on any blind-spots I might have. I gave it my actual trade data for the last three years and asked it to critique my performance from the perspective of my favorite super-traders: Richard Wyckoff, Jesse Livermore, Linda Bradford Raschke, William J. O'Neil, Cathie Wood, Nicolas Darvas, Raghee Horner and Mark Minervini. I then loaded the feedback into NotebookLP and listened to the podcast it created. It was one of the most enlightening experiences I’ve had in a long time. The common feedback was that I was stuck in grinder mode.
Who are grinders?
We are:
Risk-Averse: I typically take very calculated, low-risk bets. I’m not looking for the big score, but rather consistent, small wins.
Tight: I only take trades with very clear, high-probability setups.
Disciplined: I am rarely tempted by the potential for larger gains.
Volume-Based: My strategy generally relies on making many small, profitable trades rather than a few big ones.
Profit-Focused, Not Win-Rate Focused: My goal is not to win every trade, but to be profitable over time.
Risk-Reward Conscious: I typically look for trades where the potential reward outweighs the risk, even if the rewards are modest.
I would say this is my trading style 80% of the time. While this approach is profitable, and personally a lot of fun, it has never delivered a BIG day. If you read in-between the lines, grinders don’t have BIG days. It isn’t our ‘way’. But, I’m ready to make that leap from grinder to super-trader mode and I want to create strategies that support that effort as well.
So what else can we learn from the super-traders of history?
Wyckoff’s method focused on the concept of "springs" and "upthrusts" which often signaled the beginning of a trend. He would then use the pullback as a point of entry for the continuation.
"The trend of the market is the most important single element in a speculative situation."
- Richard Wyckoff
Livermore was also known for his trend-following strategies, which often involved continuation trades. Livermore's "pivotal point" strategy involved waiting for a stock to break out of a trading range, then entering in the direction of the breakout after the pullback, anticipating a continuation of the move.
Linda Bradford Raschke, best known for her publications on the basic 80-20 formula, uses elements of both trend and swing trading.
Expect a swing trade to last 2-3 days, but let it run 10 days or more when it is a big winner.
- Linda Bradford Raschke
William J. O'Neil, the founder of Investor's Business Daily, developed the CAN SLIM system, which includes elements of continuation trading. O'Neil looked for stocks breaking out of chart patterns on high volume.
Nicolas Darvas developed a box theory that often involved continuation trades. He would buy stocks as they broke out of their "boxes" (trading ranges) to new highs, anticipating a continuation of the uptrend.
Raghee Horner is best known for her experience as a trend trader in the futures market. She says that identifying a dominant or trending market is the first step in trading.
Mark Minervini looks for strong stocks showing "constructive price action," often involving continuation patterns like bull flags or the three bar play.
Ross Cameron looks for stocks on an uptrend on volume (confirmed by news). I’ll talk more about Ross Cameron’s approach in an upcoming post on risk management.
What do these super-traders all have in common? They had BIG wins and they all recognize(d) the power of trends. Each of these traders developed ways to identify and capitalize on the continuation of these trends using various price patterns, technical indicators and risk management schemes. When traded properly, this allows for 1) higher win rates, and 2) the ability to build a cushion, which 3) allows for greater risk taking when the opportunity presents itself.
The following three strategies use the same patterns, indicators and risk management schemes that have allowed super-traders to make the move from grinder to legendary.