Falling three Method
The falling three methods is a bearish candlestick pattern that can be used to confirm continued downward pressure of a given security.
The pattern consists of five different candlesticks. The first candlestick is a big day. The second, third and fourth candles are all smaller days. While it does not matter if these days are up or down days they only need to stay below the open and above the close of the first candlestick.
The last day of the pattern is another large dawn day. This day must break below the close of the first day. After it does this pattern gives us a sell signal.
Why does this work? The first candlestick sets a defined support and resistance levels determined by it open and close. When the last candle makes it to a new low it is as if the stock has just broken support.
Below is an example of how a falling three method pattern will appear on a chart.
Why does this pattern work? When the first day appears it establishes support (the low for the day) and resistance (the high for the day). By staying in between those 2 levels the next 3 days show indecision in the market and strengthen those support and resistance levels.
When the last day closes below the low of the first day it indicates that a new low has been reached and just like any break of support it shows that new selling pressure is coming into the market and this will drive prices down.
Tip
The last day needs to break below the close of the first. If it does not that could mean this is not a bearish signal at all.
Other Candlestick Patterns
Here are some other patterns to watch out for when trading.
Bearish Two Black Crows
Bullish Matching Low
Dark Cloud Cover
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