Falling Three Methods

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The “Falling Three Methods” is a bearish, five-candle continuation pattern that signals an interruption of a current downtrend but not a reversal.

This pattern is characterized by two long candlesticks in the direction of the trend—down—at the beginning and end, with three shorter counter-trend candlesticks appearing in the middle.

This pattern contrasts with the Rising Three Methods, which signals a continuation of an uptrend.

Table of Contents

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 often resulting from profit-taking or an attempt by eager bulls anticipating a reversal.

The subsequent failure to make new highs or close above the opening price of the initial long-down candle emboldens bears to re-engage, leading to a resumption of the downtrend.

The Falling Three Methods pattern forms when the five candlesticks meet the following criteria:

The first candlestick in the pattern is a long bearish candlestick within a defined downtrend.

It is followed by 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 is a long bearish one that pierces the lows established by the first candlestick, indicating that the bears have regained control.

The series of small-bodied candlesticks in the middle of the Falling Three Methods pattern represents a period of consolidation before the downtrend resumes.

These small-bodied candlesticks are ideally bullish, especially the second one, although this is not a strict requirement.

This pattern is important because it shows traders that the bulls still don’t have enough conviction to reverse the trend.

Active traders often use it 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.

Traders should ensure 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.

It’s prudent for traders to check other time frames to confirm that the downtrend has ample room to continue.

Related Concepts

What Are the Rising Three Methods?

The Rising Three Methods is another candlestick pattern that indicates a trend is likely to continue rather than reverse or hesitate.

Like the Falling Three Methods, it is composed of a series of candles but has opposite implications.

What Is a Moving Average?

A moving average helps to identify the direction of a trend by monitoring information over a period of time and dividing the resulting number to pinpoint an average.

It is recalculated on an ongoing basis.

What Do Bearish and Bullish Mean?

A bear market results from falling stock prices, while a bull market occurs when prices are steadily and incrementally increasing.

Bull markets tend to occur in a healthy economy, while bear markets often result from a sustained period of economic decline.

Concluding Thoughts

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 flexibility can place a stop above the third small countertrend candle or the high of the first long bearish candle in the pattern.

Before taking a trade, traders should check that there are no major support levels on the daily and weekly charts, especially if the pattern forms on the 60-minute chart.

While this pattern can provide valuable insights into market behavior, it should be used in conjunction with other technical indicators and risk management strategies to optimize trading outcomes.