Meaning of Falling Three Method

Popular belief is that investing for the long-term is the best way of entering the equity markets. Although long-term investing is widely accepted, it is not the only method of investing. If you have the right tools, it is possible to put in money for a shorter or very short time. This can be extremely rewarding. Candlestick charts are a great technical tool for traders of all levels. Both novice and experienced traders can easily understand the colour-coded chart.

If interpreted correctly, the story of the red and green candlesticks tells a story. Let's talk about the story behind five candlesticks. If they are arranged in a particular pattern, it will be called a falling-three method.

Formation:

Although the pattern is called the falling three candlestick, it actually consists of five candles. The falling three pattern is not a sign of a trend reversal but of continuation. This is a bearish trend and indicates a temporary interruption to the larger trend. In this instance, it is a downward trend.

A number of red candlesticks will be visible before a falling three-method candlestick pattern is formed. This indicates a downward price movement. One long red candle is the first candlestick in a falling three-method candlestick. Three short, green candles follow the first candle. The three short candles should be placed in the first red candle's body to create a perfect three-leaf candlestick. The bodies of the three candles can't be any higher or lower than that of the first. A long, red candle follows the three candles. The closing candle should be lower than the first candle to signify a wider bearish trend.

Meaning:

The falling three candlestick pattern, also known as the downward trend, is an indication that the bears are in control of the market. This pattern forms when the bulls take over, but they are not able completely to dominate the bears. This causes a halt in the price's downward movement, which is indicated by the three short green candles. The bulls lose momentum and are quickly overtaken. The long red candle at its end completes the pattern. It closes below that of the first long candle. Although the falling three candlestick pattern can be considered a bearish one, you may also see a similar pattern with different colours. The rising three candlestick pattern is a bullish pattern that includes a long, green candle with three small red candles inside and a closing green candle above the first.

How do you trade?

The falling three candlestick pattern as defined in the textbook may not produce the desired results. The ideal form of the pattern is three short green candles enclosed within two long red candles.

Confirmation

Although the falling three methods are a bearish pattern, it is important that you have additional proof before trading according to the pattern. Sometimes you need to wait until the signal is confirmed. The bears will usually take control of the market in ideal circumstances after the last red candle from the three falling methods has been formed. However, active trades may have different scenarios. Even after the formation the falling three candlestick pattern, the market can rise. It is better to look at five bars immediately following the formation of this pattern before deciding on the next course of action. This would confirm the larger trend and make shorting less risky.

Volumes

The volume of trades is another important factor to consider. The candlestick pattern shows us the market's actions. Although this information is important, it can be supplemented with additional data to give you a better idea of the market's conviction. Most people will be tempted to shorten because the falling three candlestick pattern can be considered a bearish pattern. However, going short is a foolproof strategy if the volume of the green bearish candles is lower than that of the short candles.

Conclusion:

The falling three candlestick pattern is a useful tool for formulating efficient trading strategies. However, traders should not rely too heavily on one pattern. Instead, they should look at the falling 3 candlestick pattern alongside other indicators.