How to trade using rising and falling three method candlestick patterns

Introduction

Any experienced trader will tell an investor who is starting to invest in security trading that it is more analysis than chance, by carefully charting a security trade while using historical data can make all the difference, and for any candlestick trader, the rising/falling three methods pattern can be a tell-tale indicator to a key market change, in which rising three method pattern is a continuation signal for an uptrend, and it appears as 5 candles, while either side is characterised by long-bodied candles with 3 falling candles in the middle, and the falling three method patterns are 3 short-bodied rising candles which is within 2 long-bodied candles.

Types of Three Methods Candlestick Pattern

The three method pattern has been used in both bullish and bearish markets, and at the core, it’s a continuation pattern, and that being said depending on the kind of market that it appears in, there are two variations to the three methods pattern.

The Rising Three Methods Pattern 

rising three method candlestick pattern

This pattern appears to be in an uptrend that may have initially shown signs of trending downward, and it signifies that any downward trend appearing on the price chart of the security is temporary and that the security will overall then continue to rise. 

The Falling Three Methods Pattern

falling three method candlestick pattern

The opposite of the rising three methods pattern is then the falling three methods, and this pattern appears in a bearish market that has shown some signs of improvement, and it signifies that any price rise is temporary and that the prevailing downtrend is then likely to continue.

How to identify the Three Methods Pattern in Candlestick Trading?

Candlestick patterns are the visual cues but on a crowded chart, they can easily get lost in minute price changes, and being able to spot the key identifiers of the three methods pattern, while it is the first step to maximizing its potential in technical trading. 

Construction and Key Characteristics of Rising & Falling Three Method Patterns

  • The Rising Three Methods Pattern: This variation has got two full-bodied, while the trend follows candles on either side, but in the middle, there are 3 consecutive, and descending small-bodied candles, and 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, and it has two full-bodied, trend-following candles, but in the middle, the 3 consecutive candles are ascending, while this pattern resembles a “Z” rotated clockwise 90 degrees. 

How to Leverage Three Methods Pattern in Making Trade & Investment Decisions?

No candlestick pattern has been 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 able to be accurate then here are a few options:

  • Fortify the Position: In the event of a rising three method, one can use the temporary decrease in price to buy more of a particular security, but the uptrend is by continuing this might be the best point to be able to add the investment before one eventually exits. 
  • Bypass Overbought Markets: In the event of a falling three method, one will be able to tell which securities are bad overall investments, and 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 now being traded at. 
  • Prevent Early Exit: A falling stock can be worrisome to any vested trader, but leaving too soon on a stock with major upward momentum can be like missing the one that got away, and analyze security for any rising three method patterns, while if there are enough of them then it means minor fluctuations in price can be disregarded and the investment is then safe. 

How to Improve the Reliability of Three Methods Pattern under Candlestick Trading?

Combining candlestick patterns with market indicators is the biggest way to be able to confirm trend predictions, and for the three method pattern the following indicators work wonders:

  • Money Flow Index: Also known as an MFI, this indicator can be used to be able to show overbought or oversold conditions, and in a falling three method pattern, the 3 middle candles that represent the minor bullish activity can ensure that the activity remains bearish in the long-term, and one can use the MFI to confirm the hypothesis that a continuation is likely.
  • Open Interest: In a rising pattern, the 3 consecutive candles can show uncertainty among buyers, and to ensure the rising trend is continuing while checking the open interest after the 5th candle, and if the OI is high then one can assume the interest and price will continue to rise upwards. 
  • PCR: The Put-Call Ratio can give one an insight into how other market bulls are treating certain security, and if one uses the PCR in combination with the aforementioned techniques then one may be able to establish a strong, nigh perfectly accurate prediction of short-to-medium term market trends. 

How to be able to Trade Three Methods Pattern in Candlestick Trading?

Now that all the basics are out of the way one can put the three method pattern to use in an active trading strategy, therefore 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, while it is based on short market fluctuations, and as such combining scalping with the appearance of the rising patterns that can offer an investor a chance to be able to buy during a temporary fall just to turn around and sell as the trend continues to rise. 

Market Environment

Scalping and three methods patterns both work best on a continuing, trend following markets, therefore they can be used in a volatile market due to their reliance on short-term trends there are far better patterns to look at and better indicators to use. 

Identify and Confirm Trade Opportunity 

It is 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, while a wise investor would seek out securities that don’t just have a setup, but that is also known to have followed similar setups in the past.

Determine Trade Entry, Stop Loss, & Take Profit Levels

Generally one will only want to enter securities that display a rising method pattern while using the data to enter in a predicted area of temporary price drop and set the stop-loss within close range of the entry point, while taking profit levels can vary depending on strategy but for scalping, one will 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, but there are a couple of moves that one can make to ensure that the investment is sound.

  • Bail on a Divergent Market: If the market becomes divergent after one enters into trade then it’s best to cut the losses and reinvest in another security, and if all of the data suggest a trend following but the market does otherwise, then either the predictions were based on faulty data or the market has an undiscovered underlying factor, while in either case using continuous market techniques on 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, but if the closing price consistently decreases in each rising method pattern then it may be a sign of overall downward trending security, let it be of how slow the decline may be. 

Advantages & Limitations of Trading Three Methods Patterns

Advantages of Trading Three Methods Pattern

Listed below are a few key advantages of trading three methods pattern that one should consider in the trading plan – 

  1. It is relatively straightforward to be able to trade using this pattern
  2. It can offer low-risk entry points for the short-term trading opportunities

Limitations of Trading Three Methods Pattern

  1. It is not very accurate in a diverse market
  2. It relies too heavily on complementary indicators to identify profitable trading opportunities

Conclusion

Like many candlestick patterns, the three methods pattern can mean a bearish or bullish market depending on where it falls, while unlike most other patterns the three methods pattern offers near-perfect predictions in an ideal environment, and all trades involve some level of risk but good analysis minimizes the likelihood of a loss, therefore one should apply the candlestick learnings slowly.

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