Pattern Falling Three Methods
Falling Three Methods is a bearish trend continuation pattern consisting of five candles that forms in a downtrend. This pattern shows a temporary consolidation or rest within an existing downtrend before its continuation.
Key Features:
- First candle is black (bearish) with opening price higher than closing price (O > C) and a long body.
- The next three candles are white (bullish) with opening price lower than closing price (O < C), with small bodies (B * 3 < pB), (B == pB), (B == pB).
- The bodies of the three middle candles do not extend beyond the range of the first candle.
- Fifth candle is black (bearish) with opening price higher than closing price (O > C) and a long body (B > pB * 3).
- The fifth candle breaks through the low of the first candle and closes lower.
- Forms in a downtrend.
Interpretation
Falling Three Methods is considered a reliable signal of downtrend continuation:
- The first long black candle shows the strength of the downtrend.
- Three small white candles represent a temporary consolidation or correction, during which buyers were unable to significantly change the trend.
- The fifth long black candle confirms the return of control to sellers and the continuation of the downtrend.
- This pattern can be viewed as a flag or pennant in classical technical analysis.
- Such a sequence of candles indicates that the correction was used to accumulate short positions before continuing the downward movement.
Trading Strategies
Falling Three Methods provides good opportunities for entering or strengthening short positions:
- Enter a short position at the opening after the fifth candle or when the low of the first candle breaks.
- Place a stop-loss above the high of the correction candles or above the high of the first candle.
- Target profit can be set using a projection equal to the distance from the beginning of the trend to the first candle of the pattern.
- Pay attention to volume - ideally, volume decreases on the three middle candles and significantly increases on the fifth candle.
- Combine with other technical indicators to confirm the signal.
- Consider important support levels below the current price that may affect the development of the movement.