Any experienced trader will tell you security trading is more analysis than chance. Carefully charting a security trade using historical data can make all the difference. For any candlestick trader, the rising/falling three methods pattern can be a tell-tale indicator of key market changes.
A rising three method pattern is a continuation signal for an uptrend. It appears as 5 candles. Either side is characterized by long-bodied candles with 3 falling candles in the middle. The falling three method patterns are 3 short-bodied rising candles within 2 long-bodied candles.
Thanks to research and serious conversations with traders and financiers, we’ve compiled everything you need to know about this candlestick pattern below.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Types of Three Methods Candlestick Pattern
The three method pattern is used in both – bullish and bearish market. At the core, it’s a continuation pattern.
That being said, depending on the kind of market that it appears in, there are two variations to the three methods pattern. Described below are both these variations of this pattern –
The Rising Three Methods Pattern
This pattern appears in an uptrend that may have initially shown signs of trending downward. It signifies that any downward trend appearing on the price chart of the security is temporary and that the security will overall continue to rise.
The Falling Three Methods Pattern
The opposite of the rising three methods pattern is the falling three methods. This pattern appears in a bearish market that has shown some signs of improvement. It signifies that any rise in price is temporary and that the prevailing downtrend is likely to continue.
How to identify Three Methods Pattern in Candlestick Trading?
Candlestick patterns are visual cues but on a crowded chart, they can easily get lost in minute price changes. Being able to spot the key identifiers of the three methods pattern, is the first step to maximizing its potential in technical trading.
Therefore, to help you accurately identify this continuation candlestick pattern, let us briefly discuss it’s construction and it’s key characteristics.
Construction and Key Characteristics of Rising/Falling Three Method Patterns
- The Rising Three Methods Pattern: This variation has two full-bodied, trend following candles on either side. However, in the middle, there are 3 consecutive, and descending small-bodied candles. Visually, the pattern resembles a reverse “Z” set on its side.
- The Falling Three Method Pattern: The falling pattern is a lot like the rising. It has two full-bodied, trend following candles, but in the middle, the 3 consecutive candles are ascending. This pattern resembles a “Z” rotated clockwise 90 degrees.
How to Leverage Three Methods Pattern in Making Trade/Investment Decisions?
No candlestick pattern is 100% accurate every time so making a major play based on the appearance of any one factor can result in losses. But if the three method pattern proves to be accurate then here are a few options:
- Fortify Your Position: In the event of a rising three method, you can use the temporary decrease in price to buy more of a particular security. Because the uptrend is continuing this might be the best point to add to your investment before your eventual exit.
- Bypass Overbought Markets: In the event of a falling three method, you’ll be able to tell which securities are bad overall investments. If there are multiple falling method patterns then it’s safe to assume the security is continuously overbought and that it’s true long term value may be far less than what it’s currently being traded at.
- Prevent Early Exit: A falling stock can be worrisome for any vested trader. But leaving too soon on a stock with major upward momentum can be like missing the one that got away. Analyze a security for any rising three method patterns. If there are enough of them then it means minor fluctuations in price can be disregarded and your investment is currently safe.
How to Improve the Reliability of Three Methods Pattern in Candlestick Trading?
Combining candlestick patterns with market indicators is the biggest way to confirm trend predictions. For the three method pattern the following indicators work wonders:
- Money Flow Index: Also known as an MFI, this indicator can be used to show overbought or oversold conditions. In a falling three method pattern, the 3 middle candles represent minor bullish activity to ensure that the activity remains bearish in the long-term. Ause the MFI to confirm your hypothesis that a continuation is likely.
- Open Interest: In a rising pattern, the 3 consecutive candles can show uncertainty among buyers. To ensure the rising trend is continuing, check the open interest after the 5th candle. If the OI is high then you can assume the interest and price will continue to rise upwards.
- PCR: The Put-Call Ratio can give you an insight into how other market bulls are treating a certain security. If you use the PCR in combination with the aforementioned techniques then you may be able to establish a strong, nigh perfectly accurate prediction of short-to-medium term market trends.
How to Trade Three Methods Pattern in Candlestick Trading?
Now that the basics are out of the way we can put the three method pattern to use in an active trading strategy. While there are many different strategies to trade using the three methods pattern, scalping is considered a reliable strategy to trade using it in most circles.
Scalping is based on short market fluctuations. As such, combining scalping with the appearance of rising patterns can offer an investor a chance to buy during a temporary fall just to turn around and sell as the trend continues to rise.
Described below are certain considerations that you should make when leveraging this candlestick pattern to make trading decisions. Also, remember to use a multiple indicator setup before deciding on a trade using this pattern, as that would potentially boost the accuracy of your trading decisions sizably.
Market Environment
Scalping and three methods patterns both work best on a continuing, trend following markets. While they can be used in a volatile market due to their reliance on short-term trends there are far better patterns to look for and better indicators to use.
Identify and Confirm Trade Opportunity
Identify trade options on securities accounting for how much they have followed three methods pattern setups in the past and based on complementary readings from the MFI, OI, and PCR. A wise investor would seek out securities that don’t just have a setup, but that are also known to have followed similar setups in the past.
Determine Trade Entry, Stop Loss, and Take Profit Levels
Generally, you’ll only want to enter securities that display a rising method pattern. Use your data to enter in a predicted area of temporary price drop and set your stop-loss within close range of your entry point. Take profit levels can vary depending on strategy but for scalping, you’ll set it targeting close to a 0.5% profit on the trade.
Execute and Manage Trade
The three methods pattern is perfect for any short term scalping strategy thanks to its ability to cut out insignificant price changes. However, there are a couple of moves that you can make to ensure that your investment is sound.
- Bail on a Divergent Market: If the market becomes divergent after you enter into trade then it’s best to cut your losses and reinvest in another security. If all of your data suggest trend following but the market does otherwise, then either your predictions were based on faulty data or the market has an undiscovered underlying factor. In either case, using continuous market techniques on a volatile security will result in heavy losses.
- Chart the Closing Price of any Rising Method Pattern: Any security that continuously shows a rising method can be considered fairly resilient. However, if the closing price consistently decreases in each rising method pattern then it may be a sign of an overall downward trending security, regardless of how slow the decline may be.
Advantages and Limitations of Trading Three Methods Patterns
Now that we have covered the basics around three methods pattern, let us now discuss a few advantages and disadvantages of trading using it –
Advantages of Trading Three Methods Pattern
Listed below are a few key advantages of trading three methods pattern that you should consider in your trading plan –
- It is relatively easy and straightforward to trade using this pattern
- It can offer low-risk entry points for short-term trading opportunities
Limitations of Trading Three Methods Pattern
- It is not very accurate in a divergent market
- It relies too heavily of complementary indicators to identify profitable trading opportunities
Author’s Recommendations: Top Trading and Investment Resources To Consider
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Conclusion
Like many candlestick patterns, the three methods pattern can mean a bearish or bullish market depending on where it falls. Unlike most other patterns the three methods pattern offers near-perfect predictions in an ideal environment. All trades involve some level of risk but good analysis minimizes the likelihood of a loss. Apply your candlestick learnings slowly and for more trading information be sure to check out our other candlestick articles.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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