Falling Three Methods Candlestick Pattern: Meaning, Strategy & How to Trade

Ever watched the stock market charts and felt like you’re reading hieroglyphics?

Trust me, I’ve been there.

You see these weird red and green bars moving up and down.

And everyone’s talking about “patterns” like they’re some secret code.

Well, today I’m breaking down one pattern that actually makes money.

The Falling Three Methods candlestick pattern.

No fancy jargon.

No confusing theories.

Just real talk about how this pattern works and how to trade it.

What is the Falling Three Methods Pattern?

Picture this.

You’re watching a stock that’s been falling hard.

Suddenly, it takes a small break.

Goes up a tiny bit for 2-3 days.

Then BAM!

It continues falling even harder.

That’s the Falling Three Methods pattern in a nutshell.

It’s like a boulder rolling down a hill.

It might hit a small bump and slow down for a second.

But gravity wins.

And it keeps rolling down faster than before.

The Technical Breakdown

The pattern has 5 parts:

First Candle: A big red (bearish) candle that shows strong selling pressure

Middle Candles: 2-3 small green candles that don’t go above the first red candle

Last Candle: Another big red candle that closes below the first red candle

Think of it as a seller taking a quick coffee break.

But then coming back to finish the job.

How to Spot the Falling Three Methods Pattern

Most people overcomplicate this.

They look at 50 different indicators.

Check 20 different timeframes.

And end up confused.

Here’s how I spot it:

Step 1: Find a Downtrend

Don’t even bother looking for this pattern in an uptrend.

It won’t work.

The stock needs to be already falling.

Think of it like surfing.

You need the right wave (downtrend) to catch the ride.

Step 2: Look for the Big Red Candle

This candle should be significantly larger than recent candles.

It shows that sellers are in control.

Volume should be higher than normal.

If volume is weak, skip it.

Step 3: Count the Small Green Candles

You’ll see 2-3 small green candles.

These represent weak buying attempts.

Key point: They should NOT break above the high of the first red candle.

If they do, the pattern fails.

Step 4: Wait for Confirmation

The final red candle is your confirmation.

It should:

• Be bigger than the small green candles
• Close below the first red candle’s low
• Have decent volume

No confirmation = No trade.

Period.

Why the Falling Three Methods Pattern Works

Here’s the psychology behind it.

When a stock is falling, some traders think they’re smart.

They see a small bounce and think:

“Oh, it’s reversing! Time to buy!”

So they jump in.

But the original sellers aren’t done yet.

They use this small bounce to sell even more shares.

At better prices.

It’s like trying to catch a falling knife.

You might stop it for a second.

But you’ll probably get cut.

The smart money waits.

They let the amateurs buy the fake bounce.

Then they sell into that strength.

Driving prices even lower.

My Falling Three Methods Trading Strategy

I’ve been trading this pattern for years.

Lost money learning the hard way.

But now I have a system that works.

Here’s exactly what I do:

Entry Strategy

Option 1: Aggressive Entry

• Enter short when the 5th candle breaks below the first red candle’s low
• Use a tight stop loss above the recent highs

Option 2: Conservative Entry

• Wait for the pattern to complete
• Enter on the next red candle after confirmation
• Safer but might miss some profits

I prefer Option 2.

Better safe than sorry.

Stop Loss Placement

Always place your stop loss above the highest point of the middle green candles.

Add 1-2% buffer for market noise.

If the price goes back above those highs, the pattern failed.

Cut your losses and move on.

Take Profit Targets

Target 1: 1:1 risk-reward ratio

• If you’re risking Rs. 100, target Rs. 100 profit

Target 2: Previous support levels

• Look for areas where the stock bounced before

Target 3: Round numbers

• People love round numbers like Rs. 1000, Rs. 500, etc.
• These often act as psychological support

Take partial profits at each target.

Don’t be greedy.

Real Trading Example

Let me share a recent trade I made.

Stock: Reliance Industries Timeframe: Daily chart Date: March 2024

Setup:

• Reliance was in a clear downtrend
• First red candle dropped from Rs. 2800 to Rs. 2750
• Next 3 days showed small green candles (Rs. 2750 to Rs. 2780)
• Fifth day opened with a gap down to Rs. 2720

My Trade:

• Entered short at Rs. 2720
• Stop loss at Rs. 2790 (risk: Rs. 70)
• Target 1: Rs. 2650 (reward: Rs. 70)
• Target 2: Rs. 2600 (reward: Rs. 120)

Result:

• Hit Target 1 in 2 days
• Hit Target 2 in 5 days
• Total profit: Rs. 95 per share

Risk-reward: 1:1.35

Not bad for a week’s work.

Common Mistakes to Avoid

Mistake 1: Trading Against the Trend

I see this all the time.

People try to use this pattern in uptrends.

It doesn’t work.

The pattern needs a strong downtrend to be effective.

Mistake 2: Ignoring Volume

Volume tells you if the move is real.

No volume = Weak move = Skip the trade

High volume = Strong move = Consider the trade

Mistake 3: Not Waiting for Confirmation

FOMO kills accounts.

Wait for the pattern to complete.

Don’t jump in early thinking you’re smart.

The market will humble you quickly.

Mistake 4: Poor Risk Management

Never risk more than 2% of your account on any single trade.

I don’t care how “perfect” the setup looks.

One bad trade shouldn’t wipe you out.

Best Markets for Falling Three Methods

This pattern works across different markets.

But some are better than others.

Indian Stock Market

Works great on Nifty 50 stocks.

High liquidity means better execution.

Banking stocks like HDFC, ICICI show this pattern often.

Forex Markets

EUR/USD and GBP/USD are my favorites.

24-hour market means more opportunities.

But watch out for news events.

They can mess up your patterns.

Cryptocurrency

Bitcoin and Ethereum show clear patterns.

But volatility is insane.

Use smaller position sizes.

When the Pattern Fails

No pattern works 100% of the time.

The Falling Three Methods fails when:

Strong Support Levels

• If the stock hits major support, it might reverse
• Check previous lows and round numbers

Positive News

• Earnings beats, merger announcements, etc.
• Can override technical patterns

Market Reversal

• If the overall market suddenly turns bullish
• Individual patterns become less reliable

Low Volume

• Without volume, patterns are weak
• Skip low-volume setups

When a pattern fails, cut losses quickly.

Don’t hope and pray.

The market doesn’t care about your feelings.

Advanced Tips for Better Results

Tip 1: Use Multiple Timeframes

I check 3 timeframes:

• Daily chart for the main pattern
• 4-hour chart for entry timing
• 1-hour chart for precise entries

This gives me better confirmation.

Tip 2: Combine with Other Indicators

RSI: Look for oversold conditions (below 30) Moving Averages: Price should be below key MAs Support/Resistance: Identify key levels

Don’t rely on just one indicator.

But don’t use too many either.

3-4 indicators max.

Tip 3: Trade During High Volume Sessions

In Indian markets:

• 9:30 AM to 11:30 AM (opening session)
• 2:00 PM to 3:30 PM (closing session)

These times have the best volume and movement.

Tip 4: Practice on Paper First

Before risking real money:

• Practice on demo accounts
• Track your results
• Note what works and what doesn’t
• Only go live when consistently profitable

Risk Management Rules I Follow

Rule 1: Never risk more than 2% per trade

If my account is Rs. 1,00,000, I risk maximum Rs. 2,000 per trade.

Rule 2: Maximum 3 trades per day

More trades = More mistakes.

Quality over quantity.

Rule 3: No trading on news days

RBI announcements, budget days, etc.

Patterns don’t work when emotions are high.

Rule 4: Cut losses at stop loss

No exceptions.

No “just one more candle.”

Discipline beats hope every time.

Tools I Use for Pattern Recognition

TradingView

Best charting platform in India.

Clear candlestick patterns.

Easy to spot the Falling Three Methods.

Free version works fine for beginners.

Zerodha Kite

Good for actual trading.

Quick execution.

But charting is basic.

I use it for trades, not analysis.

Excel Spreadsheet

Track all my trades.

Pattern success rate.

Monthly P&L.

Boring but necessary.

Building Your Trading Plan

Here’s a simple template:

Pre-Market Routine

• Check overall market sentiment
• Scan for stocks in downtrends
• Identify potential Falling Three Methods setups

During Market Hours

• Wait for pattern confirmation
• Execute trades with proper position sizing
• Monitor stop losses

Post-Market Review

• Record trade results
• Note what worked/didn’t work
• Plan for next day

Consistency beats complexity.

Every single time.

Psychological Aspects of Trading This Pattern

Trading isn’t just about patterns.

It’s about controlling your mind.

The Waiting Game

Most people can’t wait.

They see 2 green candles and think the pattern is forming.

Then they enter early.

And lose money.

Patience is your biggest weapon.

Dealing with Losses

You will lose money.

That’s guaranteed.

The goal isn’t to never lose.

It’s to lose small and win big.

Accept losses as the cost of doing business.

Avoiding Revenge Trading

Lost on a trade?

Don’t immediately look for the next one.

Take a break.

Clear your head.

Come back with a fresh perspective.

Revenge trading kills more accounts than bad patterns.

Backtesting the Falling Three Methods

I spent months backtesting this pattern.

Here’s what I found:

Success Rate: 65-70% Average Winner: 1.5R Average Loser: 1R Best Timeframe: Daily charts Best Markets: Large-cap stocks

These aren’t amazing numbers.

But they’re profitable.

And that’s what matters.

How to Backtest Yourself

1. Pick 10 stocks from Nifty 50
2. Go back 2 years on daily charts
3. Mark every Falling Three Methods pattern
4. Calculate win/loss ratio
5. Note average profits/losses

This gives you confidence in the pattern.

And helps you refine your strategy.

Combining with Fundamental Analysis

I’m primarily a technical trader.

But I don’t ignore fundamentals completely.

What I Check

Earnings: Avoid stocks near earnings announcements

Debt Levels: High debt companies fall harder in downtrends

Sector Trends: Don’t fight sector momentum

News Flow: Major negative news can accelerate patterns

Fundamentals give context.

Technicals give timing.

Use both.

Different Market Conditions

The Falling Three Methods works differently in various conditions.

Bear Markets

Pattern works like magic.

Higher success rates.

Bigger moves.

More opportunities.

This is when the pattern shines.

Bull Markets

Still works but with lower success rates.

Fake patterns are more common.

Be extra careful with confirmations.

Consider reducing position sizes.

Sideways Markets

Hit or miss.

Sometimes works at resistance levels.

But often gets chopped up.

Focus on other patterns during ranging markets.

Technology and Automation

Setting Up Alerts

I use TradingView alerts for:

• New downtrends starting
• Pattern formation in progress
• Volume spikes
• Breakout confirmations

This saves hours of chart watching.

Scanning for Opportunities

Daily routine:

• Scan Nifty 500 stocks
• Filter for stocks in downtrends
• Look for volume increases
• Mark potential pattern formations

Takes 30 minutes every morning.

Beats staring at charts all day.

Building Your Watchlist

Not every stock forms good patterns.

Here are my criteria:

Liquidity Requirements

• Minimum Rs. 10 crore daily turnover
• Tight bid-ask spreads
• Quick order execution

Volatility Sweet Spot

• Not too volatile (crypto-like moves)
• Not too stable (government bonds)
• 2-5% daily moves are perfect

Sector Selection

• Banking stocks (lots of patterns)
• Auto stocks (cyclical nature)
• IT stocks (global factors)

Avoid penny stocks completely.

They’re manipulated too easily.

The Reality of Pattern Trading

Let me be brutally honest.

This isn’t a get-rich-quick scheme.

Most days, you won’t find perfect setups.

Some trades will lose money.

You’ll question yourself constantly.

The 80/20 Rule

80% of your profits come from 20% of your trades.

Most trades will be small winners or small losers.

A few big winners will drive your profits.

This is normal.

Don’t chase every small move.

Dealing with Losing Streaks

You’ll hit periods where nothing works.

5-6 losses in a row.

It’s brutal.

But it’s part of the game.

Stick to your rules.

Don’t change strategies mid-stream.

Trust the process.

Advanced Variations

Once you master the basic pattern, try these variations:

The Extended Method

Sometimes you get 4-5 small green candles instead of 2-3.

Same logic applies.

Just wait for the final red confirmation candle.

The Gap Version

Pattern forms with gaps between candles.

More aggressive move.

Higher profit potential.

But also higher risk.

The Volume Spike Method

Final red candle comes with massive volume.

Usually indicates strong institutional selling.

These moves tend to be bigger and faster.

Building Your Trading Journal

Track these details for every trade:

Entry Details:

• Date and time
• Entry price
• Position size
• Risk amount

Pattern Quality:

• How clear was the pattern?
• Volume confirmation?
• Overall trend strength?

Exit Details:

• Why did you exit?
• Profit/loss amount
• Lessons learned

Market Context:

• Overall market condition
• Sector performance
• Any news events

This data is gold.

It shows you what works and what doesn’t.

Most traders skip this step.

That’s why most traders lose money.

Common Questions Beginners Ask

“How Often Should I Find This Pattern?”

Good question.

If you’re finding 10 patterns every day, you’re probably seeing things that aren’t there.

Quality over quantity.

1-2 high-quality setups per week is realistic.

“Can I Use This on Intraday Charts?”

Yes, but success rates drop.

Intraday charts have more noise.

More fake patterns.

Start with daily charts.

Once profitable, explore shorter timeframes.

“What If the Pattern Forms Near Support?”

Great question.

This is where the pattern often fails.

Strong support levels can stop the downward move.

Check your support and resistance levels before trading.

The Money Management System

This is where most people mess up.

They find a good pattern.

Then risk their entire account on it.

Don’t be that person.

Position Sizing Formula

Risk per trade = 2% of account Stop loss distance = Entry price – Stop loss price Position size = Risk amount ÷ Stop loss distance

Example:

• Account size: Rs. 1,00,000
• Risk per trade: Rs. 2,000 (2%)
• Entry: Rs. 1000
• Stop loss: Rs. 1020
• Stop distance: Rs. 20
• Position size: Rs. 2,000 ÷ Rs. 20 = 100 shares

Simple math.

Protects your account.

Keeps you in the game long-term.

Seasonal Patterns and Timing

The Falling Three Methods works better during certain times:

Best Months

• September-October (post-monsoon selling)
• March (year-end book closing)
• May (election uncertainties)

Worst Months

• November-December (festive season rally)
• January (fresh money flow)

This isn’t a hard rule.

But I’ve noticed these trends over the years.

Time of Day Matters

Best Times:

• 9:30-10:30 AM (opening volatility)
• 2:30-3:30 PM (closing moves)

Avoid:

• 12:00-1:00 PM (lunch break, low volume)
• Last 15 minutes (manipulation risk)

Integrating with Other Strategies

Don’t put all eggs in one basket.

I use the Falling Three Methods as part of a broader approach:

Swing Trading Portfolio

• 40% Falling Three Methods
• 30% Other bearish patterns
• 20% Mean reversion plays
• 10% Momentum trades

Risk Distribution

• Maximum 20% of capital in pattern trades
• Rest in diversified investments
• Emergency fund outside trading account

Balance is key.

Technology Tools That Help

Mobile Apps

• TradingView mobile for pattern alerts
• Broker apps for quick execution
• WhatsApp groups for pattern sharing (but verify everything yourself)

Desktop Setup

• Dual monitors (game changer)
• Fast internet connection
• Backup power supply

Alert Systems

• Price alerts for pattern completion
• Volume alerts for unusual activity
• News alerts for fundamental changes

Technology should make trading easier.

Not more complicated.

The Learning Curve

Let me set realistic expectations.

Month 1-2: Pattern Recognition

• Learning to spot patterns
• Lots of false positives
• Paper trading recommended

Month 3-4: Entry and Exit

• Better timing
• Understanding market context
• Small live trades

Month 5-6: Consistency

• Developing routine
• Better risk management
• Growing confidence

Month 7+: Refinement

• Advanced variations
• Multiple timeframes
• Consistent profitability

It takes time.

Don’t expect overnight success.

FAQs

Q: How reliable is the Falling Three Methods pattern?

A: In my experience, it works about 65-70% of the time when properly identified in a strong downtrend with good volume confirmation. The key is waiting for complete pattern formation and using proper risk management.

Q: Can beginners trade this pattern successfully?

A: Yes, but start with paper trading first. Learn to identify the pattern correctly, practice risk management, and understand market context before using real money. Most beginners rush and lose money initially.

Q: What timeframe works best for the Falling Three Methods?

A: Daily charts give the best results. They have less noise and clearer patterns. Once you’re profitable on daily charts, you can explore 4-hour or weekly timeframes.

Q: How do I know if the downtrend is strong enough?

A: Look for these signs: Price below key moving averages (20, 50-day), declining volume on bounces, lower highs and lower lows pattern, and negative market sentiment in that sector.

Q: Should I hold through earnings announcements?

A: No, absolutely not. Exit before earnings or any major news events. Earnings can cause unexpected moves that override technical patterns completely.

Q: What’s the minimum account size needed?

A: I recommend at least Rs. 2-3 lakhs for swing trading this pattern. With smaller accounts, position sizing becomes difficult and brokerage eats into profits.

Q: How many patterns should I trade simultaneously?

A: Start with 1-2 positions maximum. As you gain experience and capital, you can handle 5-6 positions. Never go beyond 10% of your total capital in pattern trades.

Q: What if the pattern forms during a market crash?

A: Market crashes can accelerate the pattern, leading to bigger profits. But also higher risk. Reduce position sizes during extreme volatility and be ready to exit quickly if markets reverse.

Final Thoughts

The Falling Three Methods candlestick pattern isn’t magic.

It’s just a tool.

Like a hammer is to a carpenter.

Useful in the right situations.

Useless in the wrong ones.

The real secret isn’t the pattern itself.

It’s having the discipline to:

• Wait for quality setups
• Manage risk properly
• Accept losses gracefully
• Stay consistent over time

Most people want complex strategies.

They think more indicators mean more profits.

But simple patterns, executed well, make more money.

The Falling Three Methods pattern has helped me make consistent profits over the years.

Not because it’s the best pattern.

But because I learned to trade it properly.

Start small.

Practice regularly.

Stay disciplined.

And remember – the market will always be there tomorrow.

Your capital might not be if you’re not careful.

Trade the Falling Three Methods pattern with respect, patience, and proper risk management, and it can become a valuable addition to your trading arsenal.