Chapter
Harris 3L-R Pattern Variation
Originally presented in November 2001, this system shows that you don’t have
to be a rocket scientist to come up with a profitable trading strategy. It is based on
a simple pattern developed by Michael Harris (www.TradingPatterns.com) and
previously featured in Active Trader(“Keeping It Simple,” September 2001, p.
82). It consists of two simple principles that are likely to remain true, no matter
how much the general market conditions change.
The first principle is that no market is likely to continue in the same direc-
tion more than a few days in a row before it reverses. That doesn’t necessarily
mean the longer-term trend has to change or that the move in the opposite direc-
tion will be large enough to produce a profitable trade. For example, if the market
were truly random (they almost are, but not quite), the likelihood for three up or
down days in a row would be a mere 12.5 percent (0.5 * 0.5 * 0.5 0.125).
The second principle states that you are better off trading with the momen-
tum of the market and, more often than not, using breakout trades. In this case, the
breakout is signaled on a higher high than the high of three days ago.
When both of the prerequisites have been met, enter a long position on the
next open and stay in the trade for either a 12 percent profit or a 4 percent loss.
This system is changed slightly from the one featured in the September 2001 issue,
because the profit–loss ratio is changed from 1:1 to 3:1 (throughout the rest of the
book, I use the term risk–reward relationship to describe this).
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