The Falling Three Methods Pattern is a special way to understand what might happen to the price of something, like a stock or currency, in the future. This pattern usually tells traders that the price might keep going down after taking a short break. It’s made up of five candles on a chart, which represent price movements:

1. First Big Candle (Bearish): This is a strong, downward-moving candle that shows the price is starting to drop.
2. Three Small Candles: These next three candles are much smaller and stay within the range of the first big candle. They show a short pause or break in the price drop.
3. Final Big Candle (Bearish): The last candle is another strong downward-moving one. It goes below the range of the three small candles, showing that the price is likely to keep falling.

How to Spot the Falling Three Methods Pattern

To find the Falling Three Methods Pattern on a chart, you need to look for these signs:

• First Big Candle: The first candle should be long and moving down, showing strong selling action.
• Three Small Candles: The next three candles should be smaller and stay inside the first big candle’s range. They can be either moving up a bit or down a bit, but they shouldn’t go below the first candle’s lowest point.
• Final Big Candle: The last candle should be long and bearish, breaking below the range of the three small candles, signaling that the downward trend is continuing.

Why is the Falling Three Methods Pattern Important?

This pattern is important because it shows that after a short break, the price will likely continue to drop. It helps traders predict that the price will keep going down, which can guide them in making better trading decisions.

Trading with the Falling Three Methods Pattern

Here are some strategies you can use when trading with this pattern:

• Entry Point: Enter a trade when the price drops below the range of the three small candles. This confirms that the price is likely to keep falling.
• Stop-Loss Placement: To protect yourself from unexpected changes, set a stop-loss order above the high point of the three small candles. This way, if the price goes up instead of down, you limit your loss.
• Taking Profit: Aim to close your trade when the price reaches a significant support level or use a trailing stop to secure profits as the price continues to fall. This helps you make the most of the downward trend.

Examples

Imagine you’re watching the EUR/USD currency pair. You notice a strong downward candle on the chart. Over the next few days, three small candles form, staying within the range of that first big candle. Finally, another big downward candle breaks below this range, confirming the pattern. You might decide to sell when the price drops below the range and set your stop-loss just above the three small candles.

Things to Keep in Mind

While the Falling Three Methods Pattern is helpful, it’s not perfect. Sometimes, it might give a false signal or miss an opportunity. That’s why it’s a good idea to use other tools, like trendlines or moving averages, along with this pattern. Using multiple tools together can give you a clearer picture of what’s happening in the market and help you make better trading decisions.