Learning how to read and trade them adds a valuable weapon to your trading arsenal. Most technical analysis is based on Japanese candlestick charts, after all. In this post, we’ll go over everything you need to know to trade downside gap three methods candle patterns.
To start, let’s define them.
What Is a Downside Gap Three Methods Candlestick Pattern?
A downside gap three methods is a bullish reversal formation. They occur during downtrends and consist of 1) a large-bodied candlestick moving down, 2) another large-bodied candlestick moving down that is preceded by a gap, and 3) a large-bodied candlestick moving up that opens inside the second candle and fills the gap.
***Please note, many sources list the downside gap three methods as a bearish continuation pattern. However, various quantitative analyses show that it actually acts as a bullish reversal pattern, which also matches the way the pattern looks.
It is the bullish version of the gap three methods pattern, and therefore the opposite of the upside gap three methods pattern. (Yes, you read that right. The confusion is due to naming issues, which we will discuss in the next section.) It is also an extension of the falling window, which makes it very similar to the downside tasuki gap.
Of course, no candlestick pattern guarantees a particular outcome. They are more like suggestions than promises.
So, what do downside gap three methods patterns really tell you?
What Downside Gap Three Method Patterns Mean
Downside gap three methods may have the worst naming conventions of any candlestick pattern.
Unlike some patterns, English speakers do not use the Japanese name for this one. The term “gap three methods” probably refers to how the pattern looks in some way. However, we could not find any information about its significance. (If you know the true meaning, please leave it in the comments below). Moreover, it shares a name with the three methods pattern that is a completely unrelated 5-candlestick pattern.
Even worse, a “downside” gap three methods is actually a bullish reversal pattern while an “upside” gap three methods is actually a bearish reversal pattern.
In trading terms:
- First Period – The price decreases significantly, in line with the downward trend.
- Pre/Post Market Trading – The price decreases.
- Second Period – The price decreases significantly, in line with the doiwnward trend.
- Pre/Post Market Trading – The price increases.
- Third Period – The price increases significantly, filling the gap.
This threatens the ongoing downtrend and creates several decision zones that are likely to play a major role in determining trend direction. If sellers cannot push price back below the formation, it may lead to a bullish reversal and subsequent uptrend.
Figuratively, downside gap three methods indicate that the bulls may have received reinforcements.
How To Recognize Downside Gap Three Methods Candlestick Patterns
Patterns are attractive partly because they stand out.
To the untrained eye, they may mean nothing. But to those with experience, they are something like a beacon. They draw your attention to a specific segment of price action, encouraging you to look more closely.
To gain this insight, all you need to do is learn the rules and practice finding them on the charts.
By definition, a downside gap three methods pattern has several requirements.
- It must appear during a general downtrend.
- The first candle must be a bearish long-line candlestick.
- The second candle must be a bearish long line candlestick.
- The second candle must open with a gap down.
- The third candle must be a bullish long-line candlestick.
- The third candle must open inside the first candle’s body.
- The third candle must fill the gap between the first two candles.
As you can see, each candlestick has its own rules.
However, some exceptions may be acceptable.
- The first candle doesn’t necessarily have to be a long candle, as long as it is a candlestick that gives a strong bearish bias (such as a gravestone doji).
- The first two candles don’t necessarily have to be long candles, as long as they represent a significant cumulative price decrease.
- The third candle doesn’t necessarily have to open inside the second candle, as long as it fills the gap between the first and second.
- The third candle doesn’t necessarily have to be a long candle, as long as all other criteria are met.
You may find better results by stretching some of these criteria (or even adding your own). For instance, your analysis may reveal that gap three methods patterns with larger gaps play out more reliably than those with smaller gaps. Or, you may find something else entirely.
Technically, these variations may fall more accurately under other candlestick reversal patterns, like the downside tasuki gap.
This is okay though, as implication supersedes classification. And similar patterns usually have similar implications (though not always).
Yet, that does not mean that these standards are wholly irrelevant. In fact, certain ones are definitely mandatory, such as the full gap fill and the direction of the candles in relation to trend. It just means that deeper examination may help you identify more and/or better trading opportunities.
Ultimately, how seriously you take each of these guidelines is up to you. Don’t forget that the purpose of analyzing candlestick patterns is to interpret underlying price action. Your pattern labeling skills are less important.
To this end, you need to understand where they fit.
Where Downside Gap Three Methods Fit in the Chart Narrative
The markets are often described as a battle between the bulls and the bears.
Downside gap three method patterns show that the bears pressed their advantage on candle one (and between candles one and two), pressed even further on candle two, then surrendered control to the bulls by the end of candle three.
On the chart, it looks like a turning point.
The first day played out as expected, with a powerful move lower. That was followed by more bearish action during after hours trading. From there, the second day looked much like the first, with sellers dominating the day. After that however, the buyers finally showed up, leading to a dramatic rise that began almost immediately after regular trading hours ended. By the close of the third day, price was higher than it closed on the first day.
The stage is now set for a fight over the levels highlighted by this price action. If buyers can defend these levels, the chance of a bullish reversal increases.
Please note: This is only an illustration. Downside gap three methods patterns can reflect any number of real-world scenarios.
In the short-term, it amounts to a valiant counterattack.
The question for traders:
“Can renewed selling pressure save the downtrend or will the bulls complete the reversal?”
To answer that question, you’ll need more than an understanding of Japanese candlesticks and candlestick patterns. You’ll want to evaluate both within the context of longer-term chart patterns as well as trend and price levels. You’ll also want to make use of your own chart markup and indicators.
Explore the history of your preferred asset(s) with respect to gap three methods candlestick patterns and apply your findings to your own trading style.
The more thorough your technical analysis, the more clear the story in the charts becomes.
How To Trade Downside Gap Three Methods Candle Patterns
Bullish reversal patterns are great places to enter longs or exit shorts, especially when you see them coming.
As such, downside gap three methods candle patterns serve as easy-to-spot signs of potential changes from bearish to bullish momentum. They may even lead to cycle-ending bottoms.
In most cases, you can assign greater weight to multi-stick patterns than single candles because they provide more information over a longer duration. However, you should wait for all candles to close before making any decisions. Otherwise, there is a good chance that you’ll get caught in a fake out.
Additionally, there are a few other things you should consider before trading candlestick patterns.
First and foremost, they are never a “sure thing.” According to Bulkowski’s Encyclopedia of Candlestick Patterns, if you treat them as bullish reversal signals, downside gap three methods have a hit rate of 62% (while upside gap three methods have a hit rate of 59% as bearish reversal signals). Sure, that is pretty decent but nowhere near a certainty. And obviously, this comes in direct opposition to the continuation signal narrative.
What’s more, candlestick patterns do not have uniform price targets or measured moves like chart patterns do. That makes position management trickier.
Plus, failed reversal patterns often lead to continuation or consolidation. Thus, you’d be wise to seek additional confirmation factors to increase your odds of a successful trade.
Some of these include:
- Volume – Reversals are often accompanied by elevated trading volume. For gap three methods patterns, you want to see a spike on the third candle (or shortly thereafter).
- Price Formations – Bullish reversal patterns that form just above important support levels tend to be more reliable. They also reinforce the strength of these levels.
- Oscillator Shift – Oscillating indicators like the RSI or stochastics are commonly used to identify reversals by analyzing slope, percentile, and/or divergence.
The more corroborating elements are present, the more confident you can be about the strength of a bullish gap three methods reversal signal.
Even so, it would be difficult to form a successful trading strategy built around any single candlestick pattern. There simply isn’t enough there to develop a strong edge. It would still be suboptimal with an expert understanding of trading math, order execution, market psychology, risk management, options, and automation.
In essence, gap three methods patterns are more useful idea givers than trade makers.
Better yet, you’ll probably find more success building your strategy around other tools and using candlestick patterns as the final point of confirmation.
Other Candlestick Pattern Types
There are many bullish reversal candlestick patterns.
The downside gap three methods is only one.
Likewise, there are many bearish reversal candlestick patterns. Not to mention, you have bullish continuation candlestick patterns and bearish continuation candlestick patterns.
For most traders though, tackling all candlestick patterns at once may be the best learning path.
- Abandoned Baby – Bearish | Bullish
- Breakaway – Bearish | Bullish
- Counterattack Lines – Bearish | Bullish
- Doji Star – Evening | Morning
- Engulfing – Bearish | Bullish
- Harami – Bearish | Bullish
- Harami Cross – Bearish | Bullish
- In Neck – Bearish | Bullish
- Kicking – Down | Up
- Ladder – Top | Bottom
- Last Engulfing – Top | Bottom
- Mat Hold – Bearish | Bullish
- Matching – High | Low
- Meeting Lines – Bearish | Bullish
- On Neck – Bearish | Bullish
- Separating Lines – Bearish | Bullish
- Star – Evening | Morning
- Stomach – Below | Above
- Tasuki Gap – Downside | Upside
- Three Inside – Down | Up
- Three Methods – Falling | Rising
- Three Outside – Down | Up
- Three-Line Strike – Bearish | Bullish
- Tri-Star – Bearish | Bullish
- Tweezer – Top | Bottom
- Window – Falling | Rising
Sure, it is quite a long list.
Luckily for us all, you don’t need to memorize every pattern and its criteria. Instead, focus on price action and technical analysis principles. The goal is to be able to look at any group of candlesticks and understand what they mean.
The more candlestick patterns you study, the easier this will become.
Takeaways
To review:
Downside gap three methods are a type of candlestick pattern that signal a potential bullish reversal. While not a guarantee, their appearance may indicate that market conditions are shifting in favor of buyers. When used properly, this can help you find winning trades.
Of course, there are other candlestick patterns that you should learn about. Still, the ability to recognize patterns is not enough to trade successfully on its own.
Nonetheless, you’ve now added one more weapon to your trading arsenal.
Have questions or more information to add? Contribute to the conversation in the comments below! Or, if you know someone who could benefit from this post, share it with them. You can also check out our Candlestick Patterns Guide to improve your candlestick analysis skills.