What are Falling Three Methods?

Technical analysis is the study of chart patterns, graphs, and diagrams on a screen. The idea is to understand price and volume trends and pick stocks accordingly. Technical analysis is based on the premise that historical price trends tend to repeat over time. Experienced investors use numerous technical factors to predict the future direction of a stock price. It determines the ideal entry and exit point to enter the trade.

One of the most widely used technical indicators that you can use to evaluate stocks and the market trend is through reading candlestick charts. This blog will detail a widely used candlestick pattern called Falling Three Methods. But first, let’s understand candlestick charts.

Candlestick charts and their related terms

If you have seen a chart or graph of stock, there are colored candles positioned at various places. These are called candlesticks, and the chart you are looking at is called the candlestick chart.

Candlesticks visually represent the size of the price fluctuations of a specific stock. Investors use these candlesticks to understand where the market is going (market trend) based on the price fluctuations and help them predict the trend reversal (when the current trend will be reversed). Each candle has three parts:

• The Body
• The Upper Shadow
• The Lower Shadow

The body is either of green or red color and has four points of data:

• Open The first trade during the represented period.
• High: The highest traded price.
• Low: The lowest traded price.
• Close: The last trade during the represented period.

Let’s understand the falling three methods.

What is the Falling Three Methods Candlestick Pattern?

The falling three method is a bearish pattern that occurs with five candles that is in a continued pattern. The five candle continuation pattern of falling three methods candlestick indicates an interruption but not technically a reversal of the current downtrend. This means that the falling three methods candlestick indicates that the current falling prices may rise for some time but will fall again in the future as the downtrend has not ended.

The falling three methods candlestick pattern is identified by two long candlesticks in the current downtrend direction, positioned at the beginning and the end, along with three short counter-trend candlesticks that are positioned in the middle. The falling three methods candlestick allows investors to understand that the bears are still in control of the market, and the bulls trying to reverse the trend were unsuccessful.

Understanding the Falling Three Methods Candlestick Pattern

There are two trends in the market: Bearish and Bullish. The bearish trend, also called a downtrend, happens when the bears or sellers start a massive selloff by initiating the selling of stocks to either book profits or cut their losses. On the other hand, the bullish trend, also known as an uptrend, happens when bulls or buyers start to buy the stocks at the current level at a volume that is higher than the selling volume. In such a case, the price of the stock rises and continues to do so until the buying volume is higher.

In the falling three methods, the temporary reversal of the current downtrend happens when the bears lack the conviction to keep pushing the stock price even lower from the current price level. Because of the lack of impetus, the buying volume becomes higher than the selling volume, and the trend is reversed. However, the bulls become unsuccessful in driving the price to new highs. It allows the bears to take control again and book the profits that are there because of the temporary price rise, forcing the stock to follow the prior downtrend again.

Formation of Falling Three Methods Candlesticks

The potential for the formation of falling three methods candlesticks starts when the chart shows many red-colored candlesticks, indicating an ongoing downtrend. If there are several green candlesticks, the falling three methods pattern is unlikely to be formed. Here is how the falling three methods candlestick pattern is formed:

• The first candle is a long red candle, indicating an ongoing downtrend.
• The first long red candle is followed by three short green candles, indicating a counter-trend and a temporary trend reversal.
• In the falling three methods, the three short candles are always contained in the real body of the first long red candle.
• The real bodies of the following three short candles are equal to the real body of the first long red candle, meaning that it can't be higher or lower.
• The three short candles are again followed by a long red candle, indicating that the temporary uptrend has reversed and the downtrend is likely to continue again.
• The last candle’s close is always below the close of the first long red candle, indicating a broader bearish trend.

If all the above factors are there on a candlestick chart, you can effectively identify the falling three methods and ensure that you adjust or initiate your orders accordingly.

Trading the Falling Three Methods

The best way investors use the falling three methods is by initiating a short-selling trade. When they identify the falling three methods, they know that a short pause in the downtrend is coming, but it will be followed by a further downtrend. In such a situation, you can initiate a trade on the close of the last candlestick. Furthermore, investors who want to book profits and exit the trade can do so at the time of the temporary uptrend. However, there are two factors you should consider before trading the falling three methods:

• Confirmation: It is wise to wait for the confirmation before trading the falling three methods candlestick pattern. This is because the ideal situation of the bears taking control of the market after the last red candle may differ at the time of actual trade. The market may follow an uptrend even after the chart shows a falling three methods pattern. Hence, it is vital that you consider the five bars and then decide on an ideal entry and exit point. It will ensure the confirmation of the broader bearish trend and make your trades less risky.
• Volumes: One other aspect you must consider before trading the falling three methods candlestick is the volume of the trades. The falling three methods candlestick is a bearish pattern and intrigues investors to initiate a short-selling position. However, you should always initiate a short position if the trading volume of the three short green candles is lower than both of the long red candles.

Final Word

The falling three methods candlestick is an effective candlestick pattern that can allow investors to understand the current trend, predict the future trend and find ideal entry and exit point for any specific stock. Notably, it can also allow for the formation of effective short-selling strategies and increase the potential of profits while mitigating the risk factor. However, it is advised that you use other technical factors along with the falling three methods candlestick to ensure you identify the trend in the best way possible.