Falling Three Methods Complete Guide

What is Falling Three Methods?

The Falling Three Methods is a bearish continuation candlestick pattern that appears during a downtrend, signaling that the prevailing bearish momentum is likely to persist after a brief consolidation. As described by Steve Nison in 'Japanese Candlestick Charting Techniques,' the pattern consists of five distinct bars. The first bar is a long-bodied bearish candle, reflecting strong selling pressure. This is followed by a group of three small-bodied candles (typically bullish) that trend upward but remain strictly within the high-to-low range of the first candle. These middle candles represent a temporary pause or 'breather' in the market as bulls attempt a minor recovery. The pattern concludes with a fifth bar—another long bearish candle that closes below the close of the first candle, effectively invalidating the preceding three-day bounce and confirming the resumption of the downtrend. Volume plays a critical role in validating this pattern. Ideally, volume should be heavy on the first and fifth bars, indicating strong institutional participation in the sell-off, while volume during the three middle bars should be noticeably lighter, suggesting a lack of conviction among buyers. According to Thomas Bulkowski’s research in the 'Encyclopedia of Candlestick Charts,' the Falling Three Methods has a theoretical performance as a bearish continuation pattern about 71% of the time. However, it is a relatively rare formation in modern markets. Bulkowski notes that while it is highly reliable when it does appear, its frequency is low compared to simpler patterns like the Bearish Engulfing. Traders often look for this pattern to add to existing short positions or to confirm that a trend has not yet reached its bottom.

Identification Rules

1. The market must be in an established downtrend.
2. The first bar is a long bearish (black or red) candle.
3. The next three bars are small-bodied candles that stay within the high-low range of the first candle.
4. The fifth bar is a long bearish candle that closes below the close of the first candle.

References

• Thomas N. Bulkowski (2005). Encyclopedia of Chart Patterns.
• Steve Nison (2001). Japanese Candlestick Charting Techniques.

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