The Falling Three Methods is a bearish continuation pattern and it begins with a long black (or red) candle followed by a series of up-ward reaction candles. These candles all form within the range of the original candle, but they have smaller bodies. Normally, the smaller candles are white (or green), since the large trend candle is black (or red). The fifth and final candle is the same color as the original trend candle but it closes at a new low and opens lower than the close of the previous day. The only difference between the fifth and first candle is that the fifth candle will be higher or lower, depending on the trend of the original candle.
Recognizing continuation patterns is important whether you are in a long position or a short one. Besides adding to positions, continuation patterns also confirm your other indicators, even if you are trading on the short side.
FALLING THREE METHODS
Description
The Falling Three Methods is basically the opposite of the Rising Three Methods (which is another pattern discussed in next week’s blog). The market is in a downtrend and a long black (or red) candle forms. It is then followed by a series of small candles, each consecutively higher than the previous. The optimal number of up-trending days should be three. It is important to note that two, four, or even five counter trend days can be observed. Additionally it is important to note are that these candles do not close above the open of the big black (or red) candles and that the shadows do not go above the black (or red) candle’s open. The final day of the formation should open down in the body of the last uptrend day and close lower than the first big black (or red) candle’s close.
Criteria for the Falling Three Methods
- A downtrend is in progress and a long black (or red) candle forms.
- A group of small bodied candles follow, preferably white (or green) bodied.
- The close of any of the up-trend days not does close higher than the open of the big black (or red) candle.
- The final day opens up into the body of the last uptrend day and proceeds to close below the close of the first big black (or red) candle day.
Pattern Psychology of the Falling Three Methods
The Falling Three Methods is considered to be a rest in the downtrend. Just like the Rising Three Methods, the appearance of the white (or green) candle unnerves the bears. The bulls are unable to take the prices higher and the bears regain their confidence and resume selling. The concept is that the first black (or red) candle day brings some doubt into the bull camp. The following day does the same and by the third day, the bears are now convinced that the bulls do not have the strength to push prices up anymore. The bulls get their courage back and start to step in.
Continue to learn about additional candlestick patterns as well as reversal patterns and secondary patterns to learn how you can improve your profits.
