The falling three methods is a classic Japanese candlestick pattern that signals continuation of a downtrend. It consists of five candles and represents a brief pause in selling pressure before bears regain control. This pattern is highly reliable when all criteria are met.
What is the Falling Three Methods Pattern?
The falling three methods is a five-candle bearish continuation pattern consisting of:
- First candle: A long bearish candle in a downtrend
- Middle candles: Three small bullish candles that stay within the range of the first candle
- Fifth candle: A long bearish candle that closes below the first candle's close
Key concept: The three small candles represent weak buying that fails to reverse the trend. When sellers return on the fifth candle, it confirms the downtrend will continue. The pattern shows bulls tried but could not overcome bearish momentum.
Pattern Identification Rules
All five criteria must be met for a valid falling three methods pattern:
1. Existing Downtrend
- The pattern must form during a confirmed downtrend
- Price should be making lower highs and lower lows
- Moving averages should slope downward
2. First Candle Requirements
- Must be a long bearish (red/black) candle
- Body should be significantly larger than recent candles
- Shows strong selling pressure
3. Middle Three Candles
- Should be small-bodied candles (preferably bullish)
- Bodies must stay within the high-low range of the first candle
- Typically drift upward or sideways
- Volume should decline during these candles
4. Fifth Candle Requirements
- Must be a long bearish candle
- Must close below the close of the first candle
- Volume should increase, confirming seller return
Falling Three Methods Example
Day 1: Stock drops from $50 to $45 on a long red candle with high volume.
Days 2-4: Three small green candles form, trading between $45 and $48 on declining volume.
Day 5: A long red candle drops price from $47 to $42, closing below Day 1's close of $45.
Signal: Short entry confirmed. Target the next support level.
Trading the Falling Three Methods
Entry Strategies
- Aggressive: Enter short on the close of the fifth candle
- Conservative: Wait for a lower open on day six to confirm
- Options: Buy puts with expiration 2-4 weeks out
Stop Loss Placement
- Place stops above the high of the pattern (highest point of middle candles)
- This level represents pattern invalidation
- Risk should not exceed 2-3% of account
Profit Targets
- First target: 1:1 risk-reward ratio
- Second target: Next significant support level
- Extended target: 1.5x to 2x the pattern height
- Use trailing stops after first target is hit
Volume Confirmation
Volume patterns strengthen the falling three methods signal:
- First candle: Above average volume confirms selling pressure
- Middle candles: Declining volume shows weak buying interest
- Fifth candle: Increasing volume confirms bearish resumption
- Patterns with proper volume have higher success rates
Psychology Behind the Pattern
Understanding why this pattern works improves your trading:
- Strong initial selling creates panic among longs
- Short-term traders take profits, causing a minor bounce
- New buyers step in, thinking the decline is over
- The bounce fails to make new highs, trapping buyers
- Sellers return with force, triggering stops and new shorts
Common Pattern Variations
The pattern may vary slightly while remaining valid:
- Two middle candles: Less common but still valid if other rules met
- Four middle candles: Extended pause, still valid
- Doji in middle: Acceptable, shows indecision
- One bearish middle candle: Pattern weakens but may still work
Pattern Failure Signs
Avoid trading when you see these warning signs:
- Middle candles close above the first candle's high
- Fifth candle fails to close below the first candle
- Volume increases during the middle candles
- Pattern forms against the larger trend
- Major support level is immediately below
Best Market Conditions
The falling three methods works best in these conditions:
- Strong downtrending markets
- Sector or market-wide weakness
- After earnings disappointments
- During distribution phases
- When VIX is elevated
Combining with Other Analysis
Improve pattern reliability with additional confirmation:
- Trend indicators: ADX above 25 confirms strong trend
- Moving averages: Price below 20 and 50-day MAs
- Support/resistance: Pattern breaking below support is stronger
- RSI: Bearish momentum confirmed if RSI below 50
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Summary
The falling three methods is a reliable five-candle bearish continuation pattern. It requires a long bearish candle, three small contained candles, and a final bearish candle closing below the first. Volume should decline in the middle and increase on the fifth candle. Trade this pattern only in confirmed downtrends with proper stop losses above the pattern high. When all criteria align, this pattern offers high-probability shorting opportunities.
Learn more: Rising Three Methods and How to Read Stock Charts.