The “falling three methods” candlestick pattern is indeed a bearish continuation pattern that signifies a likely continuation of a prevailing downtrend. This pattern consists of five candlesticks arranged in a specific manner within the price action.
The structure involves two relatively large bearish candlesticks that are followed by three smaller bullish (upward) candlesticks, creating a pattern that appears like a ‘flag’ or a ‘corridor’ between the two larger bearish candles. Despite the presence of these smaller bullish candles, this pattern doesn’t signal a trend reversal; instead, it suggests a temporary pause or consolidation in the downtrend before the downward momentum resumes.
Traders often interpret this pattern as a brief period of consolidation or retracement within a downtrend, indicating that the bearish trend might continue after this temporary pause. It’s considered a bearish signal and is used by some traders to anticipate the continuation of selling pressure and a potential further decline in prices.
How to identify falling three methods candlestick pattern?
Identifying the “falling three methods” candlestick pattern involves observing a specific sequence of five candlesticks within the price chart. Here are the rules to recognize this pattern:
- First and Last Candlesticks: The pattern begins with two bearish candlesticks. Both the first and last candlesticks should have substantial bearish bodies, indicating significant selling pressure. A 60% body-to-wick ratio is often used to determine the size of the bearish body.
- Three Small Bullish Candlesticks: Following the initial two bearish candles, there should be three consecutive smaller bullish (rising) candlesticks. These candles generally have smaller bodies and indicate a temporary upward movement or retracement. It’s crucial that each of these three smaller candles forms higher highs and higher lows in comparison to the prior candle.
- Importantly, the fourth candle in this sequence (the last of the smaller bullish candles) should not close above the high of the first candlestick. This condition is vital to maintain the pattern’s integrity.
- Final Bearish Candlestick: The pattern concludes with a final bearish candlestick that closes below the low of the first bearish candlestick. This last candlestick reaffirms the continuation of the bearish trend initiated by the first candles. Also, check out more forex basics at theforexprogrammer.com.
Adhering to these rules while analyzing the price chart will help in identifying and confirming the presence of the “falling three methods” candlestick pattern.
These are three rules you should follow to identify a perfect candlestick pattern. There is a complete logic behind these rules. We apply rules to distinguish between false and real market patterns.
Falling three methods: Information Table
|Number of Candlesticks
|Bearish trend continuation
|Rising three methods
What does the falling three methods candle tell traders?
Let’s read the price pattern during this candlestick pattern formation.
A big bearish candlestick on the price chart shows sellers’ momentum, which is greater than buyers. That’s why sellers are pushing the market in a bearish direction. It also represents the impulsive wave in the market.
After an impulsive wave, a retracement wave will form. The three small candlestick patterns show the minor retracement in the bullish direction in this candlestick pattern. After the retracement wave, an impulsive wave will start again.
The last bullish candlestick represents the bearish impulsive wave. It means the price will continue its bearish trend because minor retracements are bullish while big price waves are in the bearish direction.
Price shows the signs of buy or sell; you need to read the price on the chart.
How to trade falling three methods candlestick?
Before learning to trade this candlestick pattern, you should specify the best working condition by backtesting because it will help you refine good setups from the crowd.
Trading the falling three methods candlestick pattern requires specific market conditions and caution in implementation. Here are the key aspects for effectively working with this pattern:
- Trend Context: The falling three methods pattern is effective within an ongoing bearish trend. It typically forms within the middle phase of the trend, signaling a continuation of the bearish movement.
- Avoidance of Reversal Zones: It’s crucial to avoid trading this pattern at major reversal points like strong support or demand zones. These areas can invalidate the continuation pattern, leading to potential false signals.
- Oversold Conditions: Avoid trading this pattern during oversold conditions as it might indicate a potential reversal instead of a continuation. Oversold conditions often suggest exhaustion in the bearish trend.
- Entry: Enter a sell order immediately after the completion of the falling three methods pattern. The confirmation of the pattern is crucial for trade execution.
- Stop Loss: Place the stop loss above the high of the pattern, ensuring a safeguard against potential price reversals. This level acts as a buffer against possible trend invalidation.
- Take Profit: Fibonacci levels, particularly 1.618 and 2.618 extensions of the pattern, can serve as potential take profit levels. These Fibonacci extensions can offer strong price levels for profit booking.
The falling three methods pattern, although rare, provides a continuation signal within a bearish trend. It can offer opportunities to extend take profit levels for existing trades by confirming the continuity of the bearish movement. However, prudent risk management and confirmation of the pattern within appropriate market conditions are essential for successful trading outcomes.