The Power of Falling Three and Rising Three Candlestick Patterns in Market Analysis

RISING THREE METHOD

Description

The Rising Three Method is an easy pattern to see during uptrends. A long, white candle forms. It is then followed by a series of small candles, each consecutively getting lower. The optimal number of pull-back days should be three. Two or four or five pull-back days can also be observed. The important factor is that they do not close below the open of the big white candle. It is also preferred that the shadows do not go below the white candle's open. The final day of the formation should open up in the body of the last pullback day and close higher than the first big white candle. (See Figure 3.11.)

Criteria

• An uptrend is in progress. A long white candle forms.
• A group of small-bodied candles follow, preferably black bodies.
• The close of any of the pull-back days does not close lower than the open of the big white candle.
• The final day opens up into the body of the last pull-back day and proceeds to close above the close of the first big white candle day.

Pattern Psychology

The Rising Three Method, seen in Figure 3.12, is considered a rest in the trend or, in Japanese terms, a rest from battle. The concept is that the first black candle day brings some doubt into the bull camp. The next day does the same. By the third day, the bulls are now convinced that the bears do not have the strength to push prices down anymore. The bulls get their courage back and start stepping in. The pattern resembles the Western bull flag or pennant formation, however, the concept was originally developed in the 1700s. In modern terms, the market was just "taking a breather."

FALLING THREE METHOD

Description

The Falling Three Method, seen in Figure 3.13, is basically the opposite of the Rising Three Method. The market has been in a downtrend. A long black candle forms. It is then followed by a series of small candles, each consecutively getting higher. The optimal number of uptrending days should be three. Again, two or four or five counter trend days can be observed. The important factors are that they do not close above the open of the big black candle and that the shadows do not go above the black candle's open. The final day of the formation should open down in the body of the last uptrend day and close lower than the first big black candle's close.

Criteria

• A downtrend is in progress. A long black candle forms.
• A group of small-bodied candles follow, preferably white bodied.
• The close of any of the uptrend days does not close higher than the open of the big white candle.
• The final day opens up into the body of the last uptrend day and proceeds to close below the close of the first big black candle day.

Pattern Psychology

The Falling Three Method is considered a rest in the downtrend. Just like the Rising Three Method, the appearance of the white candle unnerves the bears. But as they see the bulls unable to take the prices higher, the bears gain their confidence back and resume their selling. The concept is that the first black candle day brings some doubt into the bull camp. The next day does the same. By the third day, the bears are now convinced that the bulls do not have the strength to push prices up anymore. The bulls get their courage back and start stepping in. (See Figure 3.14.)