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Duffy Three by Three – A Proprietary Indicator
by Joe Duffy
The 3-by-3 is a technical tool developed in the early 1990’s, which was initially published in Futures Magazine. It continues to be one of the better proprietary indicators, with a verifiable and empirical proof of its worth to the trader. Though it has never received much fanfare I have seen it discussed by traders who, after decades, are still using it.
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 time frame chart; intraday, daily, weekly, monthly.
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 bar’s ranges divided by 3.
Of course, the above calculations are done by your technical analysis software. The code would look something like:
The 1-2-3 entry gives the trader a solid place in both time and price to buy support 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 a 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 patter of lower lows and lower highs.
Once an up trend is established, look to enter on a test of a 3-by3 low after a 3-4 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 3-4 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, 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-e support can be first attempted on the long side.
In counting the 1-2-3 set up for sells, Bar #1 is the latest swing low bar. Bart #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 is 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 is 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.
On the daily chart below the arrows indicate the intraday price levels where entry would have occurred. Note that all characteristics of the 1-2-3 pattern are present, notably all entry points are following new swing highs.
The next chart indicates the intraday sell levels for the 1-2-3 pattern. Note that in the second instance on this chart the entry was on the “grace period” bar following Bar #3. Also not the grace period bar was an option used only because Bar #3 did not touch the 3-by3.
The following chart highlights clusters of price bars that touch a 3-by-3 high or low, where generally none of the price bars show price able to close beyond the 3-by-3. In these examples, price usually reverses.
Since there is a 3-by-3 high and a 3-by-3 low present every single price bar, the opportunity for a cluster will occur frequently. As such, the set ups are designed for quick trading.
The equity graph below is a simple test of the validity of the 3-by-3 with the 1-2-3 set up. It simply awaits a pullback from a 40 day high or low and then buys or sells the 1-2-3 set up. There is a dollar stop and a dollar profit target in this test. Thus, while lacking a few essentials to be a complete strategy in this simplified form, it has the elements of a great start.
In this example, a cluster is defined by at least 2 of 3 consecutives price bars where price touches the 3-by-3.
There is one noteworthy point to make regarding this test; we cannot test the intraday levels, as we can see them develop during actual trading. We can only test the last known value from the previous day. This is a disadvantage that probably negatively skews the results, and as such perhaps understates the usefulness of the 3-by-3 for use as a support and resistance point in real time trading. Regardless, the test indicates a healthy looking shape to the equity curve for the 3-by-3.
The 3-by-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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