Introduction:
Candlestick patterns have been an integral part of technical analysis in financial markets for centuries. They help traders and analysts decipher market sentiments and predict accurate price fluctuations. The idea is to analyze various parameters that can cause the price of the stocks and determine ideal entry and exit points to enter trades.
Japanese rice traders first invented candlestick patterns for trading in the eighteenth century. These patterns comprise one or more vertical bars, known as candles, representing price movements of assets during specific trading periods. Each candle has three distinct components – body, wicks, and colour.
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The body represents the opening and closing prices of the stock during a trading period, the upper and lower wicks represent the highest and lowest prices, and the colour represents the direction in which the stock is moving. The arrangement of candles with varying bodies, wicks, and colours forms different candlestick patterns.
What is a falling three-method candlestick pattern?
The falling three method is an uncommon yet significant candlestick pattern. It comprises five candles and typically occurs within an ongoing downtrend. The formation of the falling three methods candlestick pattern indicates an interruption, but not a reversal, of the prevailing bearish trend. It means that the stock price can rise temporarily but will fall again as the downtrend has not yet ended.
The falling three-method candlestick pattern can be characterized by the appearance of five candles. Here, the first candle is a long bearish candle, followed by three small bullish candles, and concluded by another long bearish candle. The formation resembles a stair-step pattern as the market attempts to slide upwards, only to fail and resume its downward trajectory.
Here’s how to identify this pattern:
As mentioned, the first candle in a falling three-methods pattern is a long bearish candle, representing the prevailing downtrend in the market. Its red or black color can identify it. It indicates that the sellers have dominated the stock during a trading session, resulting in a substantial price decline.
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Three small bearish candles
Three consecutive small bullish candles or a rising window will appear following the initial long bearish candle. Their red or white colour identifies them. The opening and closing prices of each of these candles fall within the high and low range of the first candle. This phase indicates a temporary arrest of the bearish momentum, resulting in a minor retracement in the stock price.
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Another long bearish candle
The pattern concludes with another long bearish candle, signifying the resumption of the primary downtrend. The closing price of the fifth candle is typically near the closing price of the first bearish candle.
Trading strategies for falling three methods
The appearance of the falling three methods pattern is a strong indicator of the continuation of the bearish trend. The brief bullish phase in the middle interrupts the trend but not a reversal. Below are a few trading strategies you can consider for this pattern:
You can consider entering a new short position or avoid exiting if you have already taken a short position when you notice the falling three methods pattern. For a relatively safer approach, you can wait for the stock price to break below the low of the final bearish candle.
You can set a stop-loss above the high of the final bearish candle to mitigate the risk of incurring significant losses. The target can be determined based on support levels or your risk-reward expectations.
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Confirmation from other technical indicators
Like any other candlestick pattern, the falling three methods can sometimes convey false signals. Confirming your trading decisions with other technical indicators is advisable for a more comprehensive investment strategy. For example, you can use volume analysis to validate the pattern. A decrease in volume during the three small bullish candles combined with an increase in volume during the formation of the final bearish candle provides additional confirmation of the pattern’s reliability.
To conclude
The falling three methods is a powerful candlestick pattern that indicates continuing the ongoing bearish trend. Recognizing the pattern and interpreting its significance can provide valuable insights into market sentiments and help you make informed trading decisions. However, confirming your trading decisions with other technical indicators and candlestick patterns is essential.
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