This rule was developed by Peter Brandt and explained in his excellent book “Diary of a Professional Commodity Trader”.
Note:
Please refer the following link on how to manage your trades
https://dreamtai.blogspot.com/2021/08/trade-management-plan-how-to-manage.html
I will try to explain this rule with examples.
1. As soon as you enter a trade, place a stop loss sell order.
2. Also, decide where the Target Price should be. You should be able to exit the trade at the Target Price.
3. When the stock price has risen to about 70% of the Target Price, you should start implementing the 3 bar trailing stop rule.
See the chart of a sample trade below.
You have purchased the stock at 4.4
The Target Price of the stock is 5.0
Total movement of stock price from entry to Target Price = 5.0 – 4.4 = 0.6
When the stock price reaches about 70% of this price level, you should begin implementing the 3 bar trailing stop loss method to get out of the stock.
The method requires 3 days of price action:
a. Day 1: A new high day : When a new high is made
b. Day 2: A set up day : When close is BELOW low of Day 1
c. Day 3: A trigger day : When close is BELOW low of Day 2
You should sell the stock at close of Day 3.
These 3 days need not be consecutive. That is, there can be other bars between these three days.
See the example chart
A high was made at 5.32. That bar is higher than the previous bars.
That bar is Day 1 bar.
The next bar after the Day 1 bar closed higher, so we can ignore it.
After this, the next bar closed lower than Day 1 bar. This is the setup bar or Day 2 bar.
After Day2 bar, the next bar closed lower than Day 2 bar. This is the Trigger bar. You should sell the stock at the close and exit the trade.
Useful Links:
https://peterlbrandt.com/wp-content/uploads/2016/03/3-Day-Trailing-Stop-Rule-3DTSR.pdf
https://uk.tradingview.com/script/MBYW84lZ-3-Day-Trailing-Stop-Rule/
https://dreamtai.blogspot.com/2021/08/trade-management-plan-how-to-manage.html
