Falling Three Methods Candlestick Patterns Explained: What They Are & How To Trade Them

Playing Markets

Falling three methods patterns are fairly rare but give a clear signal.

Since candlesticks are the basic building block of most technical analysis, the ability to recognize different candlestick patterns is a crucial trading skill.

First though, let’s start with a definition.

In this Guide to Falling Three Methods Patterns, we’ll explain:

What They Mean
How To Recognize Them
Where They Fit
How To Trade Them
Similar Candlestick Patterns

What Is a Falling Three Methods Pattern?

A falling three methods pattern is a 5-candlestick formation that may signal a bearish continuation. It may appear in a downtrend and is made up of a large bearish candlestick, three smaller bullish (or neutral) candles that never close above the first candle’s open, then another large bearish candle that closes below all previous candles.

It is the bearish version of the three methods pattern, making it the opposite of the rising three methods. It is also very similar to the bearish mat hold. Both include three small bullish candles sandwiched between two large bearish candles. These three smaller candles represent a short period of consolidation before the downtrend continues.

Of course, no candlestick pattern guarantees a particular outcome. Instead, they offer clues as to what is going on in the market.

So the question is, what does a three methods really tell you?

What Falling Three Methods Patterns Mean

Like many candlestick patterns, the name itself doesn’t reveal much.

And unlike some, English speakers do not use the Japanese name for it. The term “three methods” probably refers to how the pattern looks in some way. Yet we could not find any information about where the name comes from.

(If you know the true meaning, please leave it in the comments below).

In trading terms:

During the first period, price continued the pre-existing downtrend.
During the next three periods, price moved up but never closed higher than the first period’s open.
During the fifth period, price resumed downward movement, and closed lower than any of the preceding four periods.

This sets the stage for continuation, as buying pressure appears too weak to turn things around.

How To Recognize Falling Three Methods Candlestick Patterns

Traders are attracted to patterns partly because they are easy to spot.

However, it’s also easy to see things on the charts that aren’t truly there (or anticipate events that never come to fruition). That’s one of the reasons why waiting for confirmation is so important.

Technically, a falling three methods pattern must:

Appear during a downtrend
Begin with a bearish long candle
Have three consecutive bullish (or neutral) short candlesticks after the first candlestick that never close above the open of the first candlestick
End with another bearish long candlestick that closes below the body and wicks of all preceding candlesticks in the pattern

In practicality though, many traders will make various exceptions.

The first candle doesn’t necessarily have to be a long candle, as long as its body is longer than candles two, three, and four.
The middle three candles don’t necessarily have to be short candles, as long as all of them are shorter than candle one.
One or more of the middle candles can be bearish, as long as all of them close within the range of candle one.
There can be more than three candles between the first and last candles, as long as none of the middle candles close outside the body of the first.
The final candle doesn’t necessarily have to close below all of the wicks of the prior candles, as long it closes below their bodies.

Depending on who you ask, any of these standards may be more or less important. Moreover, some of these variations may be more properly classified as other continuation candlestick patterns, such as the bearish mat hold.

Remember, identifying the continuation itself is more important than labeling the formation. That’s not to say these standards are completely unimportant (as we’ll touch on shortly). It’s just to say that the implications are more important than the criteria.

In other words, you need to put it into context.

Where Falling Three Methods Fit in the Chart Narrative

The markets are often characterized as a battle between the bulls and the bears.

Falling three methods patterns show that the bears attempted to press their advantage on candle one, stalled for the next three candles, before finally regaining control and pressing trend further by the end of the fifth candle.

On the chart, it looks like a one-sided beatdown.

It might happen like this on a daily time frame:

As expected, the first day saw yet another big drive lower within the overall bear market. For the next three days straight, buyers tried their best to fight back. They achieved some minimal gains but could not even reach the opening price of the first day. As the fifth day began, everyone knew what was coming. Buyers backed out while sellers piled in—leading to another massive downward move, pushing price far below all the action of the preceding four days.

From here, the bears celebrate while the bulls are left wondering whether this bear market will ever end.

In the short-term, it amounts to a near-knockout blow.

The question traders need to ask themselves is, “Is there any relief in sight or will the bears continue to score win after win?”

To answer that question, you’ll need more than just an understanding of Japanese candlesticks and candlestick patterns. You’ll want to analyze both within the context of greater chart patterns as well as trend and price levels. You’ll also want to make use of your own chart markup and indicators.

Analyze the history of your preferred asset(s) with respect to three methods patterns and apply it to your own trading style.

Now, you can test (and/or stretch) the criteria we mentioned above to find the most tradeable opportunities. For example, you may find that falling three methods play out more reliably when the final candle is at least 25% longer than the first candle. Or, you may find something else entirely.

Here is where the story in the charts begins to come into focus.

This is what we call technical analysis.

How To Trade Falling Three Methods Patterns

Bearish continuation points are great places to add to your short position or move your stop loss down.

Falling three methods patterns serve as easy-to-spot signs of potential bearish continuation that may serve as a launch point for the next big leg down.

Generally, you can put more weight into multi-stick patterns than single candles. They give you more information over a longer amount of time. Still, it is considered unwise to trade based on candlestick patterns alone. They rarely have extremely high hit rates by themselves.

You need additional points of confluence to shift the probabilities in your favor.

Some of the more important ones include:

Volume – For bearish continuation, you typically want to see low trading volume on bullish moves. That means low volume on the middle candles of a falling three methods may be a good omen.
Price Formations – Bearish continuation patterns like the falling three methods tend to perform better when there is thin (or non-existent) support in their way. The further below and weaker the better.
Matching Momentum – Oscillating indicators like the RSI or stochastics are commonly used to identify continuation by analyzing slope, percentile, and/or divergence.

The fewer such factors corroborating the continuation, the less confident you can be about it.

It would be difficult to form a comprehensive trading strategy around three methods patterns (whether bullish or bearish). There simply isn’t enough there to develop a strong edge. Even with a great understanding of trading math, orders, psychology, risk management, options, and automation, you’d still have a hard time.

You’re much better off building your strategy around other tools then using continuation patterns as an additional point of confirmation.

Patterns like the three methods are much better idea givers than trade makers.

Other Candlestick Pattern Types

The falling three methods is but one of many candlestick patterns.

You’d be wise to get familiar with all of the other ones too.

Sure, there are quite a few of them. But don’t let that intimidate you.

It’s unnecessary to memorize all the names and criteria for every pattern. What’s more important is to learn the principles of price action and technical analysis.

In fact, you’re free to forget all of the names and specifications as long as you can look at a group of candlesticks and understand what they are trying to tell you.

Takeaways

To review:

Falling three methods are a type of candlestick pattern that signals a potential bearish continuation. While not a guarantee, their appearance may indicate that market conditions are going to remain the same. Thus, they can help you find winning trades.

Of course, there are other candlestick patterns that you should learn about. And even so, the ability to recognize patterns is not enough to trade successfully on its own.

Nonetheless, you’ve now added one more tool to your toolkit.

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.