What Is the Falling Three Methods Pattern?
The "falling three methods" is a bearish, five-candle continuation pattern that signals an interruption of a current downtrend but not a reversal. The pattern is characterized by two long candlesticks in the direction of the trend—in this case, down—at the beginning and end. Three shorter counter-trend candlesticks appear in the middle.
This can be contrasted with the rising three methods.
Key Takeaways
- The "falling three methods" is a bearish, five-candle continuation pattern that signals an interruption but not a reversal of a current downtrend.
- A falling three methods pattern is characterized by two long candlesticks in the direction of the trend, one at the beginning and one at the end, with three shorter counter-trend candlesticks in the middle.
- The falling three methods pattern shows traders that the bulls still don't have sufficient conviction to reverse the trend.
- It can be used by active traders as a signal to initiate short positions.
Understanding the Falling Three Methods Pattern
The falling three methods pattern occurs when a downtrend stalls as bears lack the impetus or conviction to keep pushing a security's price lower. This leads to a counter-move that is often the result of profit-taking and is possibly an attempt by eager bulls anticipating a reversal. The subsequent failure to make new highs or close above the opening price of the long-down candle emboldens bears to re-engage. This leads to a resumption of the downtrend.
- The falling three methods pattern forms when the five candlesticks meet the following criteria that are depicted in this image:
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- The long bearish candlestick within the defined downtrend is the first in the pattern.
- It's followed by the three ascending small-bodied candlesticks that trade below the open or high price and above the close or low price of the first candlestick.
- The fifth and final candlestick should be a long bearish one that pierces the lows established since the first candlestick. This indicates that the bears are back.
The series of small-bodied candlesticks at the left in the falling three methods pattern is regarded as a period of consolidation before the downtrend resumes.Thesecandlesticks are ideally bullish, especially the second one, although this isn't a strict requirement.
This pattern is important because it shows traders that the bulls still don't have enough conviction to reverse the trend. It's used by some active traders as a signal to initiate new short positions or add to their existing short positions.
The pattern’s bullish equivalent is the "rising three methods."
Trading the Falling Three Methods
The falling three methods pattern provides traders with a pause in the downtrend to initiate a new short position or add to an existing one.
A trade can be taken on the close of the final candlestick in the pattern. Conservative traders may want to wait for other indicators to confirm the pattern and enter on a close below the final candle. A trader might wait for the 10-period moving average to be sloped downward and near the high of the fifth bar in the pattern to confirm that the market is in a downtrend.
Traders should make sure that the pattern isn't sitting above a key support level, such as being located just above a major trend line, a round number, or horizontal price support. There may not be support but it's prudent for traders to check other time frames to confirm that the downtrend has ample room to continue.
What Are the Rising Three Methods?
The rising three methods is another candlestick pattern that indicates that a trend is not going to reverse or hesitate but rather continue. Like the falling three methods, it's composed of a series of candles but it comes with opposite implications.
What Is a Moving Average?
A moving average helps to identify the direction of a trend. It monitors information over a period of time and then divides the resulting number to pinpoint an average. It's recalculated on an ongoing basis.
What Do Bearish and Bullish Mean?
A bear market is the result of stock prices falling. A bull market is the opposite. It comes about when prices are steadily and incrementally increasing. Bull markets tend to occur in a healthy economy. Bear markets are often the result of a sustained period of a suffering economy.
The Bottom Line
The falling three methods pattern offers traders several options for placing suitable stop-loss orders. Aggressive traders may want to set a stop above the fifth candle in the pattern. Traders who want to give their position more wiggle room can either place a stop above the third small countertrend candle or the high of the first long black bearish candle in the pattern.
Traders should check that there are no major support levels on the daily and weekly charts before taking a trade if the pattern forms on the 60-minute chart.
