Candlestick charts have become the charting method of choice for many traders. Among candlestick patterns, three methods candlestick pattern are those that forecast the continuation of a trend. This pattern has two types.
- Falling three methods candlestick pattern
- Rising three methods candlesticks pattern.
Falling three methods appear in a downtrend, whereas rising three methods appear in an uptrend. In this article, we will focus on Falling three methods of candlestick pattern.
Definition of Falling Three methods
Falling three Methods is a bearish trend continuation pattern forms in a downtrend. It forecasts that the bearish trend will persist. The pattern consists of five candles, three smaller positive candles sandwiched between two tall bearish candles. Due to the nature of its structure, it only predicts that bearish trends will continue as bears are in charge and prices will drop.
The pattern is called a falling three-way candlestick, but it actually has five candlesticks in a row.
Recognition Criteria
Following are the conditions that need to be met for a Falling 3 method to form. You should follow these three rules to identify the perfect candlestick pattern.
- The first and last candlesticks should be a big bearish candle with a body-to-shadow ratio of 60%. The big body represents the momentum of the seller.
- After the first bullish candle, three smaller candles (white or light in colour) form; these three candlesticks should create higher highs and lower lows. The fourth candle in this pattern cannot close past the first candle’s high.
- The last bearish candle should close below the low of the first bearish candle.
`What does the falling three methods candle tell traders?
Each candlestick pattern tells us how the market moved and why it moved as it did. Analyzing candlestick patterns will help you form an understanding of the market.
A falling three-method candlestick pattern expresses that prices are naturally symmetrical. To make sound decisions when trading on a real account, you need to perceive the basics of price patterns.
Starting with a bearish trend, market sentiment is primarily negative. Selling pressure, therefore, exceeds buying pressure, and the market forms a long bearish candlestick. It also expresses the impulsive wave in the market.
The table is at least partially turned as the next day begins. After the impulse wave, a retracement wave is formed. Buyers will try to seize power and push the market up when they feel the downtrend is over.
Over the next three days, buyers managed to nudge the market up. But sellers are still strong and don’t let the market move a little bit at a time. The three smaller candlestick patterns indicate minor retracements in the bullish direction. As a result, three small bullish candles fail to break the resistance at the high of the first bearish candle. After the retracement wave, the impulsive wave begins again.
As the third day draws to a close, it is clear that the market doesn’t have the strength to break the downtrend, and sellers are still in control. Realizing this, more people in the market become bearish and choose to either let go of their long positions or enter into short positions.
A flood of sell orders hits the market, creating a long bearish candle. If it breaks below the pattern low, it will give you a clear signal that the bear trend is not over yet, and you should expect the price to make new lows.
Best working conditions for Falling Three Methods
- During a bearish trend, Falling Three Methods works. It must form the halfway of the trend.
- Traders should ensure that the pattern does not cross the key support levels. For example, it locates just above a major trend line, round number, or horizontal price support.
- Do not trade this pattern in oversold conditions.
Trading the final Three Methods
Falling Three Methods is a bearish pattern, but it’s important to get additional evidence before trading on them. You should wait for other indicators to confirm the pattern and close the trade under the final candle. For example, a trader can wait for the 10-period moving average to fall and be near the high of the 5th bar in the pattern confirming the market is in a downtrend.
Falling 3-method patterns rarely form on charts. But it can also be used to expand your take profit levels. For example, a sell trade has been opened and is now forming a Falling three Methods pattern. This candlestick pattern generated a bearish trend continuation signal, so you can extend your take profit levels by holding the trade.
Trading strategy for falling three methods candle
Following are examples of how you can create a trading strategy while trading with a falling three-methods pattern. Please remember that these strategies aren’t ready to be traded right away. You will have to tweak them to make them work with your market. So, practising trading strategies with virtual funds is advisable before implementing them in a live account.
Strategy 1
This example strategy uses the ADX to trade only when the market is breaking out of a relatively quiet bearish trend. Therefore, ADX should be less than 20. However, we do not measure the ADX from the last candle on the chart. Instead, we shift the calculation backwards by 5 bars so that the falling three methods pattern is not included in the calculation. This is because we are only interested in previous market movements, not the pattern itself.
We go short when we spot a falling Three Methods pattern, and the ADX offset by 5 bars is below 20. We will exit the trade after 5 bars.
Strategy 2
A Falling Three Methods pattern provides traders with multiple opportunities to place appropriate stop-loss orders. An aggressive trader may want to place a stop on the 5th candle of the pattern. If you want to give your position more wiggle room, you can place a stop above the third smaller countertrend candlestick. Or place a sell order immediately after the candlestick pattern forms and adjust your stop loss above the high of the pattern. The Fibonacci 1.618 and 2.618 levels of the overall pattern will be the take profit levels. The Fibonacci tool is used here because it is the best technical tool for identifying strong stop loss and take profit levels in trading.
Conclusion
Before trading any strategy or pattern, you should do your own analysis. Otherwise, you will lose in the market like most people.
Falling Three Methods candlestick patterns can help you formulate an efficient trading strategy. However, traders should be aware of over-reliance on a single pattern and should consider this pattern in combination with other indicators to reduce the risk.
