The Rising three and falling three method candlestick combination patterns are popular with the traders in trading in candlesticks. Traders prefer the patterns because of the amount of information available through them.
The rising three candlestick methods pattern and the falling three candlestick methods patterns are also candlestick combination patterns.
Here, we can see a methods pattern consisting of candlesticks of different sizes, shapes and colors to complete a meaningful combination. These are 5 candlestick patterns. The preceding and succeeding two candles are also part of the signal obtained from them.
These two are similar in structure but opposing in significance. Both of these patterns are continuation patterns. We treat them similar to other continuation patterns.
Rising Three Method Candlestick Pattern: The Complete Overview
What is a Rising Three Method Candlestick Pattern? – The Definition
The rising three methods candlestick pattern is a trend continuation pattern. It is a bullish continuation pattern. This method pattern is found during a bullish trend.
This pattern has five candlesticks in the pattern. A large green candle, followed by three small red candles and following them another large green candle. Though we name the pattern by the rising price action trend, there are three small falling candles in between the two large candles. We identify this method pattern by its formation.
This method pattern is treated as a method for trend continuation confirmation and also for trading by a few. Let’s find all the details about the candlestick pattern.
Anatomy of the Rising Three Candlestick Pattern
The rising three methods pattern is comprised of 5 candlesticks. The first one is a large bull candle, indicating the prevalent bullish trend. Thereafter come three small candles. The next candle is again a large bullish candle.
Opening and Closing Prices
The opening price and closing price of the large green candles are far apart. They are large green candles. The closing price of the green candles is greater than the opening price.
The three small candlesticks are found to be consecutive small candles. The three red candles indicate a short pice correction. Though it must be mentioned that the three small candles are not always red or bearish. It is found that they can be a mixed bag of three small candles placed one after another.
In the case of the three red candles, they are bearish candles. The gap is much less between the opening price and the closing price of the three red candles. Even if all of these three are not red candles, they have small bodies.
Shadows and Wicks
The bullish candles may or may not have shadows and wicks. Even if those are found in the two green candles, they should be small in size.
The three small candles may have shadows and wicks and they may not be very small, even though they have small bodies.
How Do You Identify the Rising Three Method Candlesticks?
Firstly, this pattern must occur in a bullish trend. It is a bullish continuation pattern.
Secondly, the pattern has at least five candlesticks, Ideally, we find two rising green candles standing at the two ends and three small red candles in between the two green candles.
Visually, the rising pattern looks like the pattern shown in the diagram. There is a large bullish candlestick at the start. And another in the end after three small candles. This combination creates a methods pattern form.
The pattern must obey some rules. The first candle is a large green candle. The price gap between the opening and closing price is large. There must be a bullish trend.
The second, third and fourth candles are small red candles, The opening and closing prices are not far apart. These three red candles follow one another in a sequence. These candles may or may not have large shadows and wicks.
If one or two small green candles replace the red candles, they must have small bodies. This phase represents the feeble action of bears trying to take control of a bullish trend. Therefore these three candles may not always be red candlesticks.
We can see in the diagram above, how the three red candles are arranged. In the whole pattern, it needs to be assured that none of the red candles should close beyond the low of the first green candle. If the low of the first bullish candle is breached, the pattern loses its shape and validity.
The fifth candle is bullish. It may open with a gap up. The fifth candlestick must close above the high of the first green candle. The fifth candle will also be a large solid candle similar to the first one.
How to Trade the Rising Three Candlestick Pattern?
The three rising pattern is a bullish pattern. Therefore, the trader can only initiate a buy position using this pattern. As his pattern appears within a bullish trend, traders who were already having a position will be assured that the trend is going to continue further.
A candlestick pattern trader must not trade by seeing the buy signal only from the pattern itself. It is necessary to take confirmation from other indicators as well. So, we assume that the trader must have taken confirmation from other indicators before committing a trade.
Trade entry is done after the fifth candle closes above the first candle. So, many traders take position during the close of the fifth candlestick. We can see the trade entry point in the diagram below.
Some traders prefer to buy the stock when the fifth candle crosses the high of the first candle. But it is advisable to watch whether the fifth candle closes above the first candle or not. If the fifth candle fails to close above the first candle, the pattern is not valid. A trader should keep that in mind.
Assuming the trader has already taken the buy trade at the preferred entry point. The trader has to put a stop loss before moving further. A trader has two options for placing the stop loss. A conservative trader may place the stop loss just below the low of the first bullish candle of this pattern.
But an aggressive trader would prefer to place the stop loss higher. Placing the stop loss just below the fifth large green candle would be preferred by the trader.
But it should also be kept in mind that an aggressive position attracts more risk. Placing stop loss is the main part of trading risk management. It should be rational and precise for every trade.
The exit price is at the trader’s discretion. Profit can be taken at a 1:2 risk (risk is the stop-loss price)/ reward ratio. The trader may place the profit target at any predefined profit percentage. Another most common profit target could be selling the stock at or near the next resistance level.
Example of Rising Three Candlestick Pattern
Here is a real example of a rising three pattern. The trade entry and stop-loss are clearly defined here in the chart. After entry, the trader waits till the price hits the next resistance level. This chart shows how good the return can be through a live chart example.
Though the three rising pattern has included a mixed bag of candlesticks here, it is valid. Between the two large candles, there are three candlesticks which are all not red.
There may be similar variations that can be seen in any candlestick pattern. A candlestick pattern trader needs to be very watchful to pick the pattern from charts.
Other Indicators to Use with Rising Three Pattern
There are some indicators that can be used for trading these methods candlestick pattern. A trader can prepare three methods candlestick pattern trading strategy by using these combinations. But it is important to note that visual identification of the rising three methods pattern in candlestick charts is necessary.
The following chart shows how to trade rising three methods pattern with a 20-period EMA. The 20-period EMA works as a good support line. A trader can exit the trade if the EMA line is decidedly broken.
Read more: Guide to Moving Averages
Trading the rising methods with RSI is often helpful. RSI above 70 is found to coincide with the rising three methods pattern here. After buying the stock the trader exits when RSI moves to an extremely overbought position and the reading goes over 90.
We all know that a decisive price move is supported by an increase in volume. Hence, trading with a volume indicator helps the trader in making decisions.
Must Read: How to Analyze Trading Volumes?
Falling Three Methods Candlestick Pattern: The Complete Overview
What is the Falling Three Methods Candlestick Pattern? – The Definition
The falling three methods candlestick pattern is also a methods pattern. This pattern occurs in a bearish trend. This is a bearish continuation candlestick pattern. In a candlestick chart, we can pick up this 5 candle combination pattern and create our trading strategy.
We treat the falling methods pattern as a bearish continuation pattern which confirms that the existing bearish trend would continue.
Anatomy of the Falling Three Candlestick Pattern
The falling three methods pattern consists of 5 candlesticks. Ideally, a large bearish candle is followed by three small green candles and a fifth large bearish candle after this completes the pattern. But as found in real charts, this method pattern may also have three small candles of different colors.
Opening and Closing prices
The large red candles at two ends are big candles. Therefore the opening and closing price gap is large in them. But the small candles have small price gaps between opening and closing prices.
Shadows and Wicks
The large candles may or may not have shadows and wicks. But the small candles may have long wicks and shadows. We can find these in the diagram above.
How Do You Identify the Falling Three Methods Pattern?
Within a bearish trend, we can find this 5 candle falling three methods pattern. Two large red candles have three small candles, usually green, between them. A practiced eye can pick them easily. Others need to closely watch the candlestick chart to pick them up.
How to Trade the Falling Three Methods Pattern?
Trading the falling three pattern is similar to the rising three pattern discussed above.
Sell or take a short position just below the low of the fifth red candle as shown in the diagram.
An aggressive trader may put stop loss above the high of the fifth red candle. Else, a conservative trader may consider placing the stop loss above the first candle of the methods pattern.
As discussed earlier, the trader has different options to choose the exit price.
Example of Falling Three Candlestick Pattern
We can see here the real scenario in a chart. After the falling three methods pattern occurred, the trader enters the trade just below the fifth bearish candle. The entry and stop-loss prices are mentioned in the chart.
The trader exits at or near the next support level. Here we find the risk/ reward ratio highly favors the trader.
Other Indicators to Use with Falling Three Pattern
A moving average can be used for trading. We have seen the use of 20 EMA in the rising three methods trading example. We can use the same with the falling three.
ADX is a volatility index. For a trend trader, low volatility is always preferable. After the trader creates a short positing below the price of the fifth candle, a low ADXreading supports the trader. As soon as ADX goes above 20, indicating a sharp increase in volatility, the trader may exit from short position.
MACD can also be used with falling three methods. When the trader creates a short trade, the MACD shows bearish reading. The trader comes out from the existing short trade after the MACD turns bullish.
RSI overbought/ oversold scale can also be efficiently used while trading the falling three. Here, in the chart below a 10-period RSI has been used with the falling three methods pattern.
The trade was taken when RSI was also in the bearish zone and RSI was showing the lowest reading. This is a 5 candle strategy, where traders exit after the fifth candle. RSI was showing the highest reading when the short trade was covered.
Both the three methods patterns are effective and give good returns over long periods. We have seen how we can increase profit by using combination trades. When other indicators support the trades, trading efficiency gets better. Traders may use these methods to increase profit, as shown in the examples above.