Since candlesticks are the basic building block of most technical analysis, the ability to read the patterns they make is a valuable trading skill. Here, we’ll go over everything you need to know to make money with gap three methods candlestick patterns.
First though, let’s start with a definition.
What Is a Gap Three Methods Candlestick Pattern?
A gap three methods pattern is a 3-candlestick formation that may signal a reversal. It consists of two large candles with a gap between them moving in the direction of trend followed by a large candle that opens inside the preceding candle and closes the gap between the first two.
***Please note, many sources list the gap three methods as a continuation pattern. However, various quantitative analyses show that it actually acts as a reversal pattern, which also matches the way the pattern looks.
The three-line strike pattern has both bearish and bullish versions, known respectively as the upside gap three methods and the downside gap three methods (though these labels are inverted). It is also an extension of the window pattern, and therefore similar to the tasuki gap. For all of these patterns, the gap represents a make-or-break price band that could shape upcoming price action.
Of course, candlestick patterns do not guarantee specific outcomes. Instead, they offer clues as to what is going on in the market.
So the question is, what do gap three methods really tell you?
What Gap Three Method Patterns Mean
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:
- During the first period, price drove strongly in the direction of trend.
- Before the second period began, price moved in the direction of the trend.
- During the second period, price drove strongly in the direction of trend.
- Before the second period began, price moved in the opposite direction of the trend.
- During the third period, price drove strongly in the opposite direction of trend and closed the gap.
This sets the stage for reversal, as those on the side of trend have used all their ammo.
How To Recognize Gap Three Methods Candlestick Patterns
Traders are attracted to patterns partly because they stand out.
However, it’s easy to see things on the charts that aren’t truly there (or anticipate events that never come to fruition). That’s the main reason you should wait for all candles to close before making decisions based on candlestick patterns.
In theory, a gap three methods pattern must:
- Begin with a long candle moving with pre-existing trend
- Have a second long candle that 1) gaps and 2) moves with trend
- End with a long candle that 1) opens inside the body of the first, 2) moves with trend, and 3) fills the gap between the first two.
In practicality, many traders will make some exceptions.
- The first candle doesn’t necessarily have to be a long candle, as long as it is a candlestick that gives a strong bias in the direction of trend (such as a dragonfly doji or gravestone doji).
- The first two candles don’t necessarily have to be long candles, as long as they represent a significant cumulative price change.
- 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.
Depending on who you ask, any of these standards may be more or less important. Technically, it would be more accurate to classify some of these variants as a different candlestick reversal pattern, such as the tasuki gap.
This is okay, as the implication means more than the classification. And similar patterns tend to have similar implications.
That’s not to say that these standards are altogether inconsequential (as we’ll elaborate on soon). You should definitely consider some non-negotiable, like the direction of the candles in relation to trend or the completely filled gap. Just keep in mind that context trumps criteria.
Ultimately, it’s up to you to decide how seriously to take each guideline.
After all, the goal of candlestick pattern analysis is to interpret underlying price action (not just label patterns correctly).
To this end, you need to understand where they fit.
Where Gap Three Methods Fit in the Chart Narrative
The markets are often characterized as a battle between the bulls and the bears.
Gap three method patterns show that those trading with trend pressed their advantage on candle one (and between candles one and two), pressed even further on candle two, then surrendered the momentum (and the ground gained on candle two) by the end of candle three.
On the chart, it looks like a potential climax.
The first day saw a powerful trending move, which continued even after the market closed. After a gap open, the second day saw more of the same and an expectation of further continuation. Yet the sentiment changed when traders awoke to an inside open on the third day. By the final bell, counter-trend pressure had pushed price back beyond the close of the first day.
Over the coming days, the gap is likely to become a crucial decision zone. If those looking for reversal can defend this price band, they have a better chance at making the trend change stick.
(This is only a hypothetical illustration, as a gap three methods pattern could represent a number of real-world scenarios.)
In the short-term, it amounts to a determined counterattack.
The question traders need to ask themselves is,
“Is the reversal locked in or will trend-side pressure retake control?”
To answer that question, you’ll need more than just 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 patterns and apply your findings to your own trading style.
Now, you can test (and/or stretch) the criteria we mentioned earlier to identify the best trade setups. For instance, you may find that gap three methods with a marubozu third candle perform more reliably. Or, you may find something else entirely.
This is the kind of technical analysis that brings the story in the charts into full focus.
How To Trade Gap Three Methods Patterns
Reversal points are great places to enter or exit trades, especially when you catch them early enough.
Gap three methods candlestick patterns serve as easy-to-spot signs of potential reversal and may even lead to cycle-defining tops or bottoms. Generally, you can assign greater weight to multi-stick patterns than single candles because they give you more information over a longer duration.
However, there are a few things you should know about trading candlestick patterns.
First and foremost, their hit rates rarely exceed 70%. According to Bulkowski’s Encyclopedia of Candlestick Patterns, if you treat them as reversal signals, upside gap three methods have a 59% hit rate while downside gap three methods have a 62% hit rate. As a trading signal, this is rather mediocre. And obviously, this comes in direct opposition to the continuation signal narrative.
In addition, candlestick patterns do not have standardized price targets or measured moves like chart patterns do. This can make it difficult to decide when to get out of your trade or how to manage your stop loss.
Moreover, failed reversal patterns often lead to continuation or consolidation. Therefore, you need additional points of confirmation to increase your odds of success.
Some such factors 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 just after).
- Price Formations – Reversal patterns that form on the right side of important price levels or trend lines are often more reliable. Always be aware of support and resistance!
- 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 a gap three methods reversal signal.
Even so, it would be difficult to form a successful trading strategy around any given candlestick pattern. There simply isn’t enough there to develop a strong edge. Even with a great understanding of trading math, order execution, market psychology, risk management, options, and automation, you’d still have a hard time.
In essence, gap three methods patterns are much better idea givers than trade makers.
Better yet, you’ll probably find more success building your strategy around other tools then using candlestick patterns as the final point of confirmation.
Other Candlestick Pattern Types
The gap three methods is but one of many candlestick patterns.
And while learning them all is not a prerequisite for successful trading, you’d certainly benefit from getting familiar with other candlestick pattern types.
They can be categorized in several ways.
The most straightforward way may be by the number of candlesticks (ie. 2-candlestick, 3-candlestick, 5-candlestick, etc.)
More helpful though, you can group them by price direction or signal type. That is, they can be bullish or bearish and/or imply reversal or continuation. Finally, you can multiply these designations together to separate them into bullish reversal, bearish reversal, bullish continuation, and bearish continuation categories.
On the other hand, you might just tackle them in alphabetical order:
- Abandoned Baby
- Breakaway
- Counterattack Lines
- Doji Star
- Engulfing
- Harami
- Harami Cross
- In Neck
- Kicking
- Ladder
- Last Engulfing
- Mat Hold
- Matching
- Meeting Lines
- On Neck
- Separating Lines
- Star
- Stomach
- Tasuki Gap
- Three Inside
- Three Methods
- Three Outside
- Three-Line Strike
- Tri-Star
- Tweezer
- Window
Sure, there are quite a few. But don’t let that intimidate you.
It’s unnecessary to memorize the name and criteria of every single pattern. The key is to learn the principles of price action and technical analysis.
In fact, you’re free to forget all of their names and specifications as long as you can look at a group of candlesticks and understand what they are trying to tell you. It’s just that the more of them you learn about, the easier this will become.
So take the time to study at least a few more of them.
Takeaways
To review:
Gap three methods patterns are a type of candlestick pattern that signal a potential reversal. While not a guarantee, their appearance may indicate that market conditions are changing. Thus, they 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 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.