Falling Three


Shape:
  • The Falling Three is a bearish continuation pattern that typically forms during a downtrend.
  • It consists of a strong bearish candle followed by three smaller bullish candles (or sometimes two to four), which stay within the range of the first bearish candle.
  • The pattern concludes with another strong bearish candle that closes below the close of the initial bearish candle, confirming the continuation of the downtrend.

Success Rate:

  • Historically, the Falling Three pattern has a relatively high success rate, particularly in strong bearish markets.
  • Success rates can vary, but some studies suggest that the pattern has a success rate of around 65-70% in achieving its price target once the final bearish candle confirms the pattern.

Sell:

  • Enter a sell position when the final bearish candle closes below the low of the first bearish candle.
  • Confirm the continuation with a significant increase in volume during the final bearish candle.

Take Profit (TP):

  • Measure the height of the first bearish candle (the distance between its high and low).
  • Subtract this height from the closing price of the final bearish candle to set the initial take profit target.
  • Example: If the height of the first bearish candle is Tk.5 and the closing price of the final bearish candle is Tk.40, the target would be Tk.35.

Stop Loss (SL):

  • Place the stop loss slightly above the high of the initial bearish candle or the highest point of the smaller bullish candles within the pattern.
  • This helps limit potential losses if the downtrend fails to continue and the price reverses.

Buy:

  • Consider buying if the pattern fails to confirm and the price breaks above the high of the initial bearish candle.
  • Also, consider buying if the price shows signs of a strong reversal and breaks above the range of the smaller bullish candles.

Profit Trailing:

  • Use a trailing stop to lock in profits as the price continues to move in your favor.
  • Adjust the stop loss level downwards as the price falls, keeping it a set distance (e.g., a percentage or taka amount) above the current price.

Lot Size:

  • Determine the lot size based on your risk tolerance and account size.
  • Ensure that the potential loss (difference between entry price and stop loss) does not exceed a predetermined percentage of your account balance (e.g., 1-2%).
Risk-to-Reward Ratio: 
  • Aim for a favorable risk-to-reward ratio (e.g., 1:2 or higher), where the potential reward is at least twice the potential risk.
Leverage: 
  • Use leverage cautiously. While leverage can amplify gains, it also increases potential losses. Ensure you have a clear understanding of how leverage works and its impact on your trades.

Other Conditions:

  • Confirm the continuation with increased volume during the final bearish candle, indicating strong selling interest.
  • Monitor overall market conditions and sentiment to ensure alignment with the bearish outlook.

Caution:

  • False continuations can occur, leading to potential losses. Always wait for confirmation before entering a trade.
  • Market volatility and external factors can influence the pattern's reliability.
  • Avoid trading Falling Three patterns in a weak or bullish market, as the success rate may decrease.

Pros and Cons of the Falling Three Pattern

Pros:

  1. High Success Rate:

    • Historically, Falling Three patterns have a high probability of successful continuation, especially when confirmed by increased volume.

  2. Clear Entry and Exit Points:

    • The pattern provides clear levels for entry (break below the initial bearish candle) and exit (stop loss above the smaller bullish candles), making it easier to plan trades.

  3. Bearish Continuation Signal:

    • Falling Three patterns typically form in downtrends and signal a continuation of the bearish move, aligning with the broader market trend.

  4. Easy to Identify:

    • The pattern's structure is relatively straightforward, making it easy for both novice and experienced traders to identify.

  5. Quantifiable Targets:

    • The height of the initial bearish candle can be used to set price targets, providing a systematic approach to profit-taking.

Cons:

  1. False Continuations:

    • Falling Three patterns can sometimes lead to false continuations, where the price moves below the initial bearish candle but then quickly reverses. This can result in losses if not managed properly.

  2. Volume Requirement:

    • Successful continuations often require a significant increase in volume. If the continuation occurs on low volume, it might be less reliable, leading to potential failure.

  3. Market Conditions Dependency:

    • The pattern's effectiveness can diminish in volatile or bullish market conditions. It is most reliable in a stable or bearish market environment.

  4. Subjectivity:

    • Identifying the smaller bullish candles can be somewhat subjective. Different traders might identify slightly different levels of resistance and support, leading to variations in pattern recognition.

  5. Time Frame Variability:

    • The pattern can form over various time frames, from minutes to months. The reliability and interpretation might differ based on the time frame, requiring traders to adapt their strategies accordingly.

Trading Psychology of Falling Three

The psychology behind the Falling Three pattern plays a crucial role in understanding why it forms and how traders react to it. Here's a breakdown of the trading psychology involved in the Falling Three:

Formation:

  • Initial Downtrend: The pattern typically forms during an existing downtrend. Traders are pessimistic, and selling pressure is strong.
  • Temporary Rebound: The price makes a temporary rebound with three smaller bullish candles. This rebound is seen as a short-lived correction within the broader downtrend.
  • Renewed Selling Pressure: Despite the temporary rebound, sellers step in again, forming a final strong bearish candle that confirms the continuation of the downtrend.

Market Sentiment:

  • Sellers' Confidence: As the price makes a final bearish move, sellers become more confident that the downtrend will continue. The persistence of strong selling pressure suggests accumulating bearish sentiment.
  • Buyers' Weakness: Buyers attempt to push the price up during the rebound, but their efforts weaken as sellers step in again. This indicates diminishing buying pressure.

Continuation Psychology:

  • Anticipation: Traders who recognize the Falling Three anticipate a continuation of the downtrend. They prepare to enter sell positions upon confirmation of the continuation.
  • Volume Increase: A significant increase in trading volume during the final bearish candle confirms that more traders are entering the market, reinforcing the bearish sentiment.
  • FOMO (Fear of Missing Out): As the continuation occurs, more traders rush to sell, fearing they might miss out on the price decline. This further drives the price down.

Post-Continuation:

  • Validation: Successful continuation validation (price closing below the initial bearish candle with increased volume) reassures traders that the pattern is legitimate. This leads to sustained selling interest.
  • Profit-Taking: Some traders might take profits near the target price derived from the initial bearish candle's height. However, the overall sentiment remains bearish unless significant support is encountered.
  • Trailing Stops: Experienced traders use trailing stops to lock in profits while allowing for further downside potential. This approach balances profit-taking with the possibility of continued price decrease.

Failure and Risk Management:

  • False Continuations: Not all continuations succeed. False continuations can occur, leading to trader frustration and potential losses. Proper risk management, such as stop-loss orders, is essential.
  • Reevaluation: If the continuation fails, traders reassess their strategy. They might look for other patterns or signals to guide their next moves.

General Tips for Managing Trading Psychology:

  1. Patience: Wait for the continuation confirmation before entering a trade to avoid false signals.
  2. Discipline: Stick to your trading plan, including predefined entry, exit, and stop-loss levels.
  3. Emotional Control: Manage emotions like FOMO and fear by focusing on your strategy and risk management principles.
  4. Continuous Learning: Stay informed about market conditions and continuously improve your technical analysis skills.

Understanding the psychology behind the Falling Three pattern can help you make more informed trading decisions and better anticipate market movements.