Rising Three and Falling Three Methods in Crypto Trading

The Rising Three Methods and Falling Three Methods have gained attention for their reliability in indicating bullish and bearish continuations, respectively. These patterns provide insights into market psychology and help traders make informed decisions amidst the volatility of digital assets. 

Read below and explore more about these chart patterns, uncovering their significance and practical applications in the crypto market. Whether you're a professional trader or a curious newcomer, understanding these patterns could be your key to unlocking profitable trading opportunities.

What is the Rising Three Methods Pattern?

The Rising Three Methods pattern is a bullish continuation pattern that typically occurs in an uptrend. It signals that the current bullish trend will likely continue after a brief period of consolidation or correction. 

This pattern consists of five candles, where the first and last candles are large bullish candles, and the three in the middle are smaller bearish candles.

The significance of the Rising Three Methods formation:

• First candle: a long bullish candle indicating strong buying pressure
• Middle three candles: typically three smaller bearish candles that move within the range of the first candle, representing a temporary consolidation or pullback
• Fifth candle: another long bullish candle that closes above the first candle's close, confirming the continuation of the uptrend

How to Identify the Rising Three Methods Pattern

Identifying the Rising Three Methods pattern involves looking for specific candlestick formations during an uptrend:

1. Confirm the uptrend – ensure that the pattern appears within a prevailing bullish trend. Don’t put an equal sign between this pattern and a bearish market, as it primarily indicates a continuation of an upward movement.
2. Spot the initial bullish candle – the first candle should be a significant bullish candle.
3. Identify the bearish pullback – the three consecutive smaller bearish candles should not exceed the range of the first bullish candle and ideally should have decreasing volume, indicating a weakening bearish presence.
4. Confirm with the final bullish candle – the final bullish candle should close above the closing price of the first bullish candle, signaling the end of the consolidation and the resumption of the uptrend.

How to Trade the Rising Three Methods Pattern

Trading the Rising Three Methods pattern involves several strategic steps:

Entry Points

After the fifth candle closes: a common approach is to enter a long position after the fifth candle closes above the first candle's close, confirming the continuation of the uptrend.

Anticipatory entry

Some traders may enter the trade during the formation of the fifth candle if they anticipate the breakout, though this carries additional risk if the pattern fails.

Placing the Stop-Loss 

Below the first candle: a conservative stop-loss can be placed below the low of the first bullish candle to protect against a potential trend reversal.

Below the middle candles: a tighter stop-loss can be placed below the lowest point of the middle three bearish candles for traders looking to minimize risk exposure.

Take Profit levels

Resistance levels: identify potential resistance levels from previous price action to set take-profit targets.

Trailing Stop: use a trailing stop to lock in profits as the price moves in your favor, allowing for maximized gains if the trend continues.

Example

In November 2023, Ethereum (ETH) showed a classic Rising Three Methods pattern on an hourly chart.

ETH started with a strong bullish candle, moving from around $1,929 to $1,936.

Over the next few hours, three small bearish candles appeared, slightly retracing but staying within the range of the first bullish candle. The price moved between $1,960 and $1,950, showing a consolidation period without breaking below the opening of the first bullish candle.

Later, ETH formed another strong bullish candle, closing above the previous highs at around $1,978, thus confirming the continuation of the uptrend.

In this case, a trader entering at around $1,970 could set a stop loss just below $1,900 (the low of the middle candles), and aim for a profit target at the next resistance level, around $2,000. The bullish continuation was confirmed as ETH continued its upward trajectory.

What is the Falling Three Methods Pattern?

The Falling Three Methods pattern is a bearish continuation pattern that occurs during a downtrend. It consists of five candlesticks, with the first and last being strong bearish candles and the three middle ones being smaller bullish candles. This formation indicates a temporary pause or minor pullback in the overall downtrend, which ultimately resumes.

The significance of the Falling Three Methods pattern:

• First candle: a long bearish candle that reflects strong selling pressure
• Middle three candles: typically, three smaller bullish candles form within the range of the first bearish candle, representing a brief consolidation or correction
• Fifth candle: another long bearish candle that closes below the first candle's close, confirming the continuation of the downtrend

How to Identify the Falling Three Methods Pattern

To identify the Falling Three Methods pattern, traders should look for the following features in a downtrend:

1. Confirm the downtrend – the pattern should appear within an existing bearish trend. It signifies the continuation of this trend after a short-lived consolidation.
2. Spot the initial bearish candle – the first candle should be a large bearish candle, indicating strong selling pressure.
3. Identify the bullish pullback – look for three consecutive smaller bullish candles that do not exceed the range of the first bearish candle. These candles typically have lower volume, reflecting a lack of strong buying interest.
4. Confirm with the final bearish candle – the final candle must be a bearish candle that closes below the first candle's close, indicating the resumption of the downtrend.

How to Trade the Falling Three Methods Pattern

Trading the Falling Three Methods pattern involves several strategic steps:

Entry Points

After the fifth candle closes: the most common strategy is to enter a short position after the fifth candle closes below the first candle's close, confirming the pattern.

Anticipatory Entry

Some traders might enter the trade during the formation of the fifth candle if they anticipate the breakout. However, this approach carries additional risk if the pattern fails to complete.

Placing the Stop-Loss 

Above the first candle: a conservative stop-loss can be placed above the high of the first bearish candle. This helps to protect against potential reversals.

Above the middle candles

For a tighter stop, you can place it above the highest point of the three middle bullish candles, limiting risk exposure.

Take Profit Levels

Support levels: identify potential support levels from previous price action to set take-profit targets.

Trailing Stop: using a trailing stop can help lock in profits as the price moves in favor of the trade, ensuring maximum gain if the trend continues.

Example

In June 2021, Bitcoin (BTC) exhibited a classic Falling Three Methods pattern on its daily chart:

On June 21, 2021, Bitcoin experienced a sharp decline, with a long bearish candlestick that saw prices drop from around $36,000 to approximately $32,000.

Over the next three days (June 22-24), Bitcoin's price showed a slight recovery, with three smaller bullish candles. These candles moved between $29,000 and $34,500, staying within the range of the first bearish candle.

On June 25, Bitcoin formed another strong bearish candle, closing below the low of the first bearish candle at around $35,900, thus confirming the continuation of the downtrend.

In this example, a trader entering at around $35,900 could set a stop loss above $40,900 (the high of the middle candles) and aim for a profit target at the next support level, around $30,900. After June 25, 2021, BTC continued to decline, reaching lower levels as the downtrend persisted.

Risk Management of Rising Three and Falling Three Methods in Trading

Here are some key considerations when it comes to risk management when trading this pattern:

Risk Management Strategies

Position sizing – use appropriate position sizing to ensure that no single trade has the potential to impact your overall portfolio significantly.

Always use stop-loss orders to cap potential losses if the market turns against your position. This protective measure ensures you don't suffer more significant losses than you're prepared to handle.

Diversification – avoid putting all your capital into a single trade or market. Diversifying your investments reduces the impact of a poor-performing asset on your overall portfolio, as losses in one area can be offset by gains in another.

Advantages and Limitations of Both Patterns

Advantages

Get a trend confirmation – both Rising Three and Falling Three Method patterns provide a strong signal of trend continuation, helping traders confirm the direction of the market.

Can set clear entry and exit points – the pattern's structure offers clear entry and exit points, making it easier to develop a trading plan.

Limitations

They’re not always clear patterns – like any pattern, the Rising Three and Falling Three Methods can fail, especially in volatile markets like cryptocurrencies, where sudden price swings can negate the expected outcome.

Provide limited profit potential – the consolidation phase can sometimes lead to a weaker bullish continuation than anticipated, limiting profit potential.

Additionally, compared to other patterns, the Rising Three and Falling Three Methods are rare and less commonly encountered in real world trading. 

The Bottom Line

The Rising Three and Falling Three Methods are valuable patterns especially if you want to specialize in trend-following strategies. They provide a structured way to capitalize on market momentum and potential future price action and can be a part of a disciplined trading approach. 

As always, you should practice due diligence and proper risk management and never use each of these patterns in isolation. Combine the pattern with other technical indicators and market analysis for a more robust trading approach.