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.
What Is a Three Methods Pattern?
A three methods pattern is a 5-candlestick formation that may signal a continuation. It is made up of a large candlestick moving in the direction of current trend, followed by three shorter candles that move against trend but do not close beyond the open of the first candle, then another large candle that closes beyond all prior candles in the direction of trend.
The three methods candlestick pattern has both bullish and bearish variations, called the rising three methods and falling three methods, respectively. It is also very similar to the mat hold pattern. Both include three smaller candles sandwiched between two drives in the direction of trend. These three smaller candles represent a short period of consolidation before the trend 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 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, the price drove strongly in the direction of trend.
- During the next three periods, price traded against trend but never closed beyond the open of the first period.
- During the fifth period, price resumed and exceeded the movement of the first period.
This sets the stage for continuation, as countertrend pressure failed to materialize.
How To Recognize 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 three methods pattern must:
- Begin with a long candle moving with trend
- Have three consecutive short candlesticks after the first candlestick, that move against trend
- Not have any of the middle candles close beyond the open of the first candle
- End with another long candle moving with trend, that closes beyond the body and wicks of all prior candles 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 none of the smaller candles close beyond the first candle’s open.
- The middle three candles don’t all have to be short candlesticks and move against the trend, as long as none close beyond the open of the first candle.
- The final candle doesn’t necessarily have to close beyond all the wicks of the prior candles, as long as it closes beyond the 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 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 Three Methods Fit in the Chart Narrative
The markets are often characterized as a battle between the bulls and the bears.
Three methods patterns show that one side 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:
After a strongly trending day, most traders stayed on the sidelines unsure what would come next. For three straight days, low trading activity led to modest moves against the trend (and steadily increasing confidence on the side of the trend). On the fifth day, those on the side of trend re-entered the fray, pushing price well beyond the trading range of the last few days.
In the short-term, it amounts to a near-knockout blow.
The question traders need to ask themselves is, “Will the trend continue or can the opposition turn things around?”
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 three methods containing doji candlesticks in the middle play out more reliably than those without. Or, you may find the opposite.
Here is where the story in the charts begins to come into focus.
This is what we call technical analysis.
How To Trade Three Methods Patterns
Continuation points are great places to add to your position or adjust your stop loss.
Three methods patterns serve as easy-to-spot signs of potential continuation that may serve as a launchpad for the next big leg up or 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 – Conventional wisdom says that elevated trading volume on the first and last candles of a three methods increases the likelihood of continuation. You might even look for it just after.
- Price Formations – Continuation patterns like the three methods tend to perform better when there is thin support or resistance in their way. If it’s a blue sky breakout, even 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. 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 three methods is but one of many candlestick patterns.
You’d be wise to get familiar with all of the other ones too.
- Abandoned Baby
- Counterattack Line
- Doji Star
- Engulfing
- Harami
- Harami Cross
- In Neck
- Mat Hold
- On Neck
- Star
- Three Inside
- Three Outside
- Tasuki Gap
- Tweezers
- Window
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:
Three methods are a type of candlestick pattern that signals a potential 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.