Everything that you need to know about the Falling Three Methods candlestick pattern is here.
Today you’ll learn:
- What Is The Falling Three Methods Candlestick Pattern
- How To Identify The Falling Three Methods Candlestick Pattern
- Variants Of The Falling Three Methods Candlestick Pattern
- How To Trade The Falling Three Methods Candlestick Pattern
- Strategies To Trade The Falling Three Methods Candlestick Pattern
- Strategy 1: Pullbacks On Naked Charts
- Strategy 2: Trading The Falling Three Methods With Support Levels
- Strategy 3: Trading The Falling Three Methods With Moving Averages
- Strategy 4: Trading The Falling Three Methods With RSI Divergences
- Strategy 5: Trading The Falling Three Methods With Fibonacci
- Strategy 6: Trading The Falling Three Methods With Pivot Points
- This is what you learned today
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What Is The Falling Three Methods Candlestick Pattern
The Falling Three Methods is a Japanese candlestick pattern.
It’s a bearish continuation pattern.
Usually, it appears as a pause after a price move to the downside and shows rejection from higher prices.
The pattern is bearish because we expect to have a bear move after the Falling Three Methods appears at the right location.
It’s a continuation pattern because before the Falling Three Methods appears we want to see the price going down, thus it’s also a frequent signal of a trend continuation.
The Falling Three Methods pattern is also a mirrored version of the Rising Three Methods candlestick pattern.
How To Identify The Falling Three Methods Candlestick Pattern
The Falling Three Methods candlestick pattern is formed by five candles.
Here’s how to identify the Falling Three Methods candlestick pattern:
- Initially, you want to see a big red candle
- Followed by three small green candles
- The green candles don’t break the high of the first red candle
- Finally, another big red candle, closing below the other candles
It looks like this on your charts:
Variants of the Falling Three Methods Candlestick Pattern
The Falling Three Methods candlestick pattern may appear a little different on your charts.
The candles may or not have wicks.
The red ones should have them small.
The green ones, if they have wicks and are big, ideally we want to see them on the top of the candles.
Here’s what it may look like on your charts:
How To Trade The Falling Three Methods Candlestick Pattern
To trade the Falling Three Methods candlestick pattern it’s not enough to simply find a series of candles with the same shape on your charts.
Let me explain.
What makes a pattern valid is not just the shape, but also the location where it appears.
This means that the same shape appearing at different locations may have different meanings.
When trading the Falling Three Methods, we want to see the price first going down, making a bearish move.
A Falling Three Methods appearing after this bearish move is a sign of a possible trend continuation to the downside.
It looks like this:
Now you’re thinking.
“When do I open my trade?”
It’s simple, the Falling Three Methods pattern is traded when the low of the last candle is broken.
That’s your conservative trigger to short.
It looks like this:
Now, you also want to protect yourself because when trading things don’t always move as we expect.
And for that, we use a stop loss.
There are several different types of stop losses.
The most common is to use the other side of the pattern to set it.
Like this:
But wait, don’t jump into trading the Falling Three Methods right yet.
There are a few more things to know.
Ideally, to increase the accuracy, we want to trade the Falling Three Methods candlestick pattern by combining it with other types of technical analysis or indicators.
Here are a few strategies to trade the Falling Three Methods pattern.
Strategies To Trade The Falling Three Methods Candlestick Pattern
Strategy 1: Pullbacks On Naked Charts
As a bearish continuation pattern, the Falling Three Methods is a great pattern to watch for when the price is on a downtrend.
Just wait for a pullback to start, and then spot when the Falling Three Methods appears.
That often signs the end of the pullback and the start of the new leg to the downside.
Here’s an example:
Strategy 2: Trading The Falling Three Methods With Support Levels
Support and resistance levels are great places to find entries.
Since we are looking for continuation moves to the downside, we want to trade the Falling Three Methods using support levels broken and retested.
How does it work:
- Draw support levels on your charts
- Wait for the price to move to the downside hitting the support level and breaking it
- After that, you want to see the price coming back to retest the support
- Check if a Falling Three Methods appears at that level
- Short when the price breaks the low of the last candle of the Falling Three Methods
- Set your stop loss and take profit levels, and expect a move to the downside
Here’s an example:
Strategy 3: Trading The Falling Three Methods With Moving Averages
Moving averages are great trading indicators to trade trends.
The idea here is to trade pullbacks to the moving average when the price is on a downtrend.
How does it work:
- Find a downtrend, with the price jumping below a moving average
- Wait for the price to go up and hit the moving average
- Check if a Falling Three Methods appears at the moving average
- Short when the price breaks the low of the last candle of the Falling Three Methods
- Set your stop loss and take profit levels, and expect another leg to the downside
Here’s an example:
Strategy 4: Trading The Falling Three Methods With RSI Divergences
This is a bit different from the other trading strategies.
To find a bearish RSI Divergence we want to see the price on an uptrend first, making higher highs and higher lows.
Here’s how it works:
- Find an uptrend
- Mark the highs that the price makes after each leg to the upside
- At the same time compare the price highs with the RSI indicator
- When you see the RSI making lower highs while the price making higher highs, you found your divergence
- Now you wait until a Falling Three Methods appears at a price higher high, aligned with an RSI lower high.
- Short when the price breaks the low of the last candle of the Falling Three Methods
- Set your stop loss and take profit levels, and expect a move to the downside.
It looks like this:
Strategy 5: Trading The Falling Three Methods With Fibonacci
Another popular way of trading the Falling Three Methods candlestick is using the Fibonacci retracement tool.
Fibonacci shows retracement levels where the price will tend to revert frequently.
Depending on the strength of the trend, different levels are more likely to work better with the Falling Three Methods pattern. Here you can learn more about the different Fibonacci retracement levels.
Here’s how the strategy works:
- You want to see the price on a downtrend, or at the start of a new one
- Then you wait for a move to the upside, they always happen at some point
- Pick your Fibonacci tool and draw the levels from the high to the low of the move
- When the price hits a Fibonacci level and prints a Falling Three Methods, that’s what you are waiting for
- Short when the price breaks the low of the last candle of the Falling Three Methods
- Set your stop loss and take profit levels, and expect a move to the downside
Here’s an example:
Strategy 6: Trading The Falling Three Methods With Pivot Points
Pivot Points are automatic support and resistance levels calculated using math formulas.
If you are day trading, the Daily Pivot Points are the most popular, although the Weekly and Monthly are frequently used too.
Here’s how to trade the Falling Three Methods pattern with Pivot Points:
- Activate the Pivot Points indicator on your charts
- Check which Pivot Points are below the price, those will tend to work as resistances when broken
- Ideally, you want to see the price on a downtrend
- Wait for a price move to the downside to a Pivot Point level and a break
- At that level, you want to see the Falling Three Methods pattern appearing and retesting the pivot point broken
- Short when the price breaks the low of the last candle of the Falling Three Methods
- Set your stop loss and take profit levels, and expect a move to the downside
This is what you learned today
- The Falling Three Methods is a five-candle pattern.
- To be valid, ideally, we want to see it during a downtrend.
- It’s a bearish continuation pattern, meaning that it signs a potential continuation of a downtrend.
- To increase the accuracy, you can trade the Falling Three Methods using pullbacks, moving averages, and other trading indicators.
Now I want to hear from you.
Do you trade the Falling Three Methods candlestick pattern?
Let me know in the comments below.
Learn More
- List of all candlestick patterns explained
