What Is a Falling Three Methods Pattern?
A bearish, five candle continuation pattern that signals an interruption, but not a reversal of the current downtrend. Painted by one long red candle, followed by three shorter green candles, ending ultimately with a continuation of the downtrend.
Example of Falling Three Method
What Does the Falling Three Method Signal?
Falling Three Methods is a bullish continuation candlestick pattern that occurs in a downtrend and whose conclusion sees a resumption of that trend. The decisive (fifth candle) is proof that buyers did not have enough momentum to reverse the downtrend. For a candlestick pattern to become a identified as a falling three methods, it must meet the following three (3) criteria:
- The first pattern must be bearish
- The second, third, and fourth candles are small and bullish. They are confined within the range of the first bearish candle.
- The last, fifth bar is bearish, and closes above the low of the pattern.
The Falling Three Methods signals an interruption, but not a reversal, of the current downtrend. This pattern is important because it shows traders that the bulls still do not have enough conviction to reverse the trend and it is used by some active traders as a signal to initiate new, or add to their existing, short positions.
Trading a Falling Three Method Pattern
Looking at the daily time frame of ETH (Ethereum) we can see a falling three methods pattern forming as a relief rally in the middle of a downtrend. This pattern indicates an interruption in the downtrend as bulls are trying to push the price back up, but are overpowered by the strength of the bears. From this falling three methods pattern, the price fell from $400 all the way down to $160 before correcting back up.
Looking at the 1-hour time frame of LYFT we can see a few indices of this pattern, but the most prominent one would be shortly after Lyft IPO’d back in April of 2019. In the middle of the downtrend, LYFT had a relief rally that the bulls painted as the first sign of a potential bottom and a reversal going back upwards, only to have the bears overtake the market and dump the stock even lower. Not fully pictured in this chart, but this dump got really ugly, even pushing the price back down to the low to mid-20’s.
Differences Between the Rising Three and Falling Three Methods Pattern
The Rising Three and Falling Three Methods are continuation patterns that can appear in an uptrend or a downtrend. In an uptrend the pattern is known as the rising three methods and in a downtrend it is called the falling three methods. Both the three methods consists of five (5) candlesticks, hence the name they are opposites of each other. The rising three has the first and fifth candle painted bullish and the falling three methods has its first and fifth candle painted bearish.
Limitations of Falling Three Methods
Just like any candlestick pattern, trading solely based off the falling three methods pattern comes with its set of limitations. First, you need to figure out in which direction the market is heading. If you’re trading and spot this pattern in the middle of an uptrend or bullish momentum, chances are this pattern isn’t valid and you need to pause and reflect. This pattern consisting of five candles is correctly identified in the middle of a bearish downtrend, moving upwards swiftly as traders are taking profits on their short, before trending to an even lower trading price. This pattern is also often known or identified as a relief rally.