What Is the Rising Three Methods Pattern?
"Rising three methods" is a bullish continuation candlestick pattern that occurs in an uptrend and whose conclusion sees a resumption of that trend. This can be contrasted with a falling three method.
Key Takeaways
- Rising three methods is a bullish continuation candlestick pattern that occurs in an uptrend and whose conclusion sees a resumption of that trend.
- The decisive (fifth) strongly bullish candle is proof that sellers did not have enough conviction to reverse the prior uptrend and that buyers have regained control of the market.
- The rising three methods may be more effective if the initial bullish candlestick's wicks, denoting the high and low traded price for that period, are shallow.
Understanding the Rising Three Methods Pattern
The rising three methods pattern forms when a security's price action meets the following characteristics:
- The first bar of the pattern is a bullish candlestick with a large real body within a well-defined uptrend.
- Subsequent candlesticks, normally three consecutive bearish small-bodied candlesticks that trade above the low and below the high of the first candlestick.
- The last bar is another bullish candlestick with a large real body that breaches the high and closes above the high and close established with the first candlestick, which suggests the bulls are back in control of the security's direction.
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The bulls are in firm control before pausing to see if there is enough conviction in the trend. The series of small-bodied candlesticks contained between the first and fifth candle in the rising three methods pattern is regarded as a period of consolidation before the uptrend resumes. The decisive (fifth) strongly bullish candle is proof that sellers did not have enough conviction to reverse the prior uptrend and that buyers have regained control of the market. Active traders may use the pattern as a signal to add to their long positions.
Similar chart formations that do not meet the exact characteristics of the pattern can still help traders identify good entry points in a trending market. For example, there may be four or five small-bodied candles, instead of three, within the pattern. The rising three methods pattern is the opposite of the falling three methods pattern.
As with other forms of technical analysis, chart reading is predicated on the assumption that markets will continue to follow the patterns established by earlier trading cycles. However, past performance is no guarantee of future results, and chart patterns may produce false positives.
How to Trade the Rising Three Methods Pattern
Entry
Traders can enter the market when the final bar in the pattern closes. Alternatively, a trade could be taken when price moves above the high of the final candle. Aggressive traders may look for an entry before the final bar closes but must be prepared to exit if the fifth bar fails to complete the pattern.
Traders should make sure the rising three methods pattern is not located beneath key resistance to ensure the uptrend has sufficient room to continue. For instance, a trendline or widely used moving average slightly above the pattern could limit further gains.
Resistance levels should be checked on longer-term charts to increase the probability of a successful trade. The "rising three methods" may be more effective if the initial bullish candlestick's wicks, denoting the high and low traded price for that period, are shallow and if it forms above a whole number.
Risk Management
Aggressive traders could place a stop-loss order below the low of the final bar in the pattern or under the second small-bodied candle, depending on their risk tolerance.
Traders who want to give their trade some room to move might place a stop order below the first bullish candle or under a recent swing low.
How Do You Spot a Rising Three Methods Pattern?
A rising three methods pattern consists of a large green candle, followed by three smaller red candles, and a final green candle that closes above the high set by the first candle. This indicates that after a period of consolidation, the market is largely dominated by buyers who will likely continue to drive prices higher. Note that the rising three methods pattern must occur after a general uptrend, as indicated by simple moving averages or other metrics.
How Do You Identify a Falling Three Methods Pattern?
A falling three methods pattern is a bearish pattern that resembles a mirror image of the rising three methods. It consists of five candles, following a general downtrend: a large red candle, followed by three small green candles, and a final red candle that closes below the bottom set by the first candle. This indicates that after a short period of uncertainty, the market is dominated by sellers who will continue to drive prices lower.
What Does the Three Methods Pattern Tell You?
Both types of three methods patterns indicate a resumed trend after a brief period of interruption. Following a sharp price move, there is a period of retracement where the buyers and sellers consolidate their positions. A following price move indicates that the trend has resumed.
The Bottom Line
The rising three methods pattern is one of many candlestick formations used by technical traders to identify bullish trends. As with other chart patterns, there is no guarantee that markets will behave as predicted, and it is worth looking to other technical indicators for confirmation.
