Falling Three Methods

What Is the Falling Three Methods Pattern?

The "falling three methods" is a bearish, five candle continuation pattern that signals an interruption, however not a reversal, of a current downtrend. The pattern is described by two long candlesticks toward the trend — in this case, down — toward the beginning and end, with three shorter counter-trend candlesticks in the middle.

This can be diverged from rising three methods.

Understanding the Falling Three Methods Pattern

Falling three methods happens when a downtrend slows down as bears lack the impulse, or conviction, to keep pushing the security's price lower. This prompts a counter move that is in many cases the consequence of profit-taking and, perhaps, an endeavor by excited bulls expecting a reversal. The subsequent disappointment at making new highs, or closing over the opening price of the long down candle, encourages bears to reconnect, leading to a resumption of the downtrend.

The falling three methods pattern forms when the five candlesticks meet the following criteria that are portrayed in the picture below:

The long bearish candlestick inside the defined downtrend is the primary in the pattern.
It's followed by the three ascending small-bodied candlesticks that trade below the open, or high, price or more the close, or low, price of the main candlestick.
The fifth, and last, candlestick ought to be a long bearish one that pierces the lows laid out starting from the principal candlestick, it are back to demonstrate that the bears.

The series of small-bodied candlesticks at left in the falling three methods pattern is viewed as a period of consolidation before the downtrend resumes. In a perfect world, these candlesticks are bullish, particularly the subsequent one, albeit this is certainly not a severe requirement. This pattern is important on the grounds that it shows traders that the bulls actually need more conviction to reverse the trend and it is involved by an active traders as a signal to start new, or add to their existing, short positions. The pattern's bullish equivalent is the "rising three methods."

Trading the Falling Three Methods

Entry Points

The falling three methods pattern gives traders a respite in the downtrend to start a new short position or add to an existing one. A trade can be assumed the close of the last candlestick in the pattern. Conservative traders might need to trust that different indicators will affirm the pattern and enter on a close below the last candle. For instance, a trader could sit tight for the 10-period moving average to be slanted downward and close to the high of the fifth bar in the pattern to affirm the market is in a downtrend.

Traders ought to ensure the pattern isn't sitting over a key support level, for example, being found just over a major trend line, a round number, or horizontal price support. Even however there may not be support, it's prudent for traders to check other time periods to affirm the downtrend has adequate room to proceed.

For instance, on the off chance that the pattern forms on the hour long chart, traders ought to check that there are no major support levels on the daily and week by week charts before taking a trade.

Risk Management

The falling three methods pattern offers traders several options for putting suitable stop-loss orders. Aggressive traders might need to set a stop over the fifth candle in the pattern. Traders who need to offer their position more space for error could either place a stop over the third small countertrend candle or the high of the main long black bearish candle in the pattern.

Highlights

The falling three methods pattern shows traders that the bulls actually don't have adequate conviction to reverse the trend.
A falling three methods pattern is portrayed by two long candlesticks toward the trend, one toward the beginning and end, with three shorter counter-trend candlesticks in the middle.
The "falling three methods" is a bearish, five-candle continuation pattern that signals an interruption, yet not a reversal, of the current downtrend.
It very well may be involved by active traders as a signal to start short positions.