Falling Three Method

The falling three method candlestick pattern is a bearish continuation pattern and it is the opposite of the rising three method candlestick pattern. This pattern indicates to traders that a bearish trend is continuing even after there is a temporary stop in trading. This pattern typically occurs after a downtrend and it ideally consists of five candles, but it must consist of more than three candlesticks.

In order to identify the falling three method pattern there are certain criteria that must be met. First, a downtrend must be in progress. Second, a long black candle must form the first day. Third, a group of small real bodies, preferably white bodies, occur and follow a brief uptrend pattern. Ideally, this group of small real bodies occurs on the second, third, and fourth days. Again, they should follow a brief uptrend pattern however they all should stay within the trading range of the first day. Last, on the fifth day, a long black candle should close below the close of the first day’s long black candle. It is important to remember that the close of any of the small real bodies should not close higher than the open of the first day’s long black candle.

What does this signal indicate is occurring in the markets?
The falling three method candlestick pattern indicates that there is a rest in the battle between the bulls and the bears. This rest is apparent in the presence of the small real white bodies and these bodies are seen as counter trend days. As a result, these small white bodies worry the bears temporarily. The bears then see that the bulls are unable to bring the price to new highs after a significant downtrend. Prices are taken to new lows which then boost the confidence of the bears and selling resumes.

Ideally the small bodies that occur in this candlestick pattern are white however they don’t have to be. These small bodies can be a mixture of white and black candles. As mentioned previously, this pattern ideally consists of five candles however it must consist of more than three candles. The first and last candles must be black long bearish candles. The falling three method signal is highly reliable of trend continuation and the reliability increases with the shortening of the middle candlestick’s real bodies and with a reduction in trading volume on those small real bodies. Confirmation of this candlestick pattern is suggested and can occur in the form of a new candlestick with a lower closing.

Japanese Candlesticks are the fastest way for new investors to quickly and accurately read stock charts. Once you are comfortable with the major candlestick signals, and you have learned how to read stock charts continue to expand your expertise by learning the various secondary Candlestick Patterns. Combine these with your favorite technical analysis indicators, such as the moving average, and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds.

Continue to learn about continuation patterns and read about the mat hold candlestick pattern.