Definition of three fall methods


What is the pattern of the three falling methods?

The “three falling methods” are a five-candle bearish continuation pattern that indicates a break, but not a reversal, of a current downtrend. The pattern is characterized by two long candles in the direction of the trend, in this case down, at the beginning and end, with three shorter candles against the trend in the middle.

This can be contrasted with the augmentation of three methods.

Key takeaways

  • The “three falling methods” are a five-candle bearish continuation pattern that indicates a break, but not a reversal, of the current downtrend.
  • A three-method descending pattern is characterized by two long candles in the direction of the trend, one at the beginning and one at the end, with three shorter candles against the trend in the middle.
  • The falling pattern of the three methods shows traders that the bulls still do not have enough conviction to reverse the trend.
  • Active traders can use it as a signal to initiate short positions.

Understand the pattern of the three falling methods

The three-method dip occurs when a downtrend stalls because bears lack the momentum or conviction to keep pushing the security’s price down. This leads to a counter move which is often the result of profit taking and possibly an attempt by eager bulls to anticipate a reversal. The subsequent failure to hit new highs, or close above the opening price of the long downward candle, encourages bears to re-commit, leading to the resumption of the downtrend.

The three method falling pattern is formed when all five candles meet the following criteria shown in the image below:

  • The long bearish candle within the defined downtrend is the first in the pattern.
  • It is followed by the three small-bodied ascending candles that trade below the open or high price and above the close or low price of the first candle.
  • The fifth and final candle should be a long bear that breaks through the lows set from the first candle, indicating that the bears are back.
Image by Julie Bang © Investopedia 2019

The series of small-body candles to the left in the three-method descending pattern is considered a period of consolidation before the downtrend resumes. Ideally, these candles are bullish, especially the second one, although this is not a strict requirement. This pattern is important because it shows traders that the bulls do not yet have enough conviction to reverse the trend and some active traders use it as a signal to initiate new short positions or add to existing ones. The bullish equivalent of the pattern is the “three ascending methods”.

Changing the three falling methods

Entry points

The three-method descending pattern provides traders with a break in the downtrend to start a new short position or add to an existing one. A trade can be made at the close of the final candle of the pattern. Conservative traders may want to wait for other indicators to confirm the pattern and enter a close below the final candle. For example, a trader can wait for the 10-period moving average to slope down and near the high of the fifth bar in the pattern to confirm that the market is in a downtrend.

Traders should ensure that the pattern is not above a key support level, such as being located just above a major trend line, round number, or horizontal price support. Although there may be no support, it is prudent for traders to check other time frames to confirm that the downtrend has ample room to continue.

For example, if the pattern forms on the 60-minute chart, traders should check for significant support levels on the daily and weekly charts before placing a trade.

Risk management

The three method descending 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 leeway could place a stop above the third small countertrend candle or the high of the first long black bearish candle in the pattern.

www.investopedia.com

Share
READ ALSO:  Definition of Blockstack
About the author

Mark Holland

Leave a comment: