Rising Three




Shape:

  • The rising three pattern is a bullish continuation candlestick pattern that typically forms during an uptrend.
  • It consists of five candles: a long bullish candle, three smaller bearish candles that remain within the range of the first bullish candle, and a final long bullish candle that closes above the high of the first candle.
  • This pattern indicates a brief consolidation or pullback within an uptrend before the continuation of the bullish movement.

Success Rate:

  • Historically, the rising three pattern has a relatively high success rate, especially when it appears in a strong uptrend.
  • Success rates can vary, but many studies suggest that this pattern has a success rate of around 60-70% in achieving its expected bullish continuation.

Buy:

  • Enter a buy position when the price closes above the high of the first bullish candle, confirming the pattern.
  • The confirmation candle should ideally be accompanied by increased volume.

Take Profit (TP):

  • Measure the height of the first bullish candle and project this distance upwards from the closing price of the fifth candle to set the initial take profit target.
  • Example: If the height of the first bullish candle is Tk.5 and the closing price of the fifth candle is Tk.50, the target would be Tk.55.

Stop Loss (SL):

  • Place the stop loss slightly below the low of the first bullish candle.
  • This helps limit potential losses if the pattern fails and the price reverses.

Sell:

  • Consider selling if the price fails to continue upwards and instead falls below the low of the first bullish candle.
  • Also, consider selling if the price reaches the take profit target or shows signs of reversal.

Profit Trailing:

  • Use a trailing stop to lock in profits as the price continues to move in your favor.
  • Adjust the stop loss level upwards as the price rises, keeping it a set distance (e.g., a percentage or taka amount) below 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 pattern with increased volume, indicating strong buying interest.
  • Monitor overall market conditions and sentiment to ensure alignment with the bullish outlook.

Caution:

  • False patterns 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 the rising three pattern in a weak or bearish market, as the success rate may decrease.

Pros and Cons of the Rising Three Pattern

Pros:

  1. Bullish Continuation Signal:

    • The rising three pattern typically forms in uptrends and signals a continuation of the bullish move, aligning with the broader market trend.

  2. Clear Structure:

    • The pattern's structure is well-defined, making it relatively easy to identify and trade.

  3. Higher Success Rate:

    • The pattern has a relatively high success rate, especially when it appears in a strong uptrend and is confirmed by volume.

  4. Clear Entry and Exit Points:

    • The pattern provides clear levels for entry (breakout above the first bullish candle) and exit (stop loss below the first bullish candle), facilitating trade planning.

Cons:

  1. False Patterns:

    • Like any pattern, the rising three can sometimes fail, leading to potential losses if not managed properly.

  2. Volume Requirement:

    • Successful patterns often require a significant increase in volume. If the breakout 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 bearish market conditions. It is most reliable in a stable or bullish market environment.

  4. Short-Term Nature:

    • The rising three pattern is relatively short-term, meaning traders need to act quickly to capitalize on the potential continuation move.

Trading Psychology of Rising Three

Formation:

  • Initial Uptrend: The pattern typically forms during an existing uptrend. Traders are optimistic, and buying pressure is strong.
  • Temporary Pullback: The three smaller bearish candles represent a temporary pullback or consolidation within the uptrend. This indicates a brief period of profit-taking or hesitation among traders.
  • Bullish Confidence: The final bullish candle suggests that buyers have regained control and are confident in the continuation of the uptrend.

Market Sentiment:

  • Buyers' Confidence: As the pattern forms, buyers become more confident that the uptrend will continue. The final bullish candle reinforces this sentiment.
  • Sellers' Weakness: Sellers attempt to push the price down during the three bearish candles, but their efforts are weak and unable to break the overall uptrend.

Breakout Psychology:

  • Anticipation: Traders who recognize the rising three pattern anticipate a continuation of the uptrend. They prepare to enter buy positions upon confirmation.
  • Volume Increase: A significant increase in trading volume during the confirmation of the final bullish candle reassures traders that the pattern is legitimate.
  • FOMO (Fear of Missing Out): As the breakout occurs, more traders rush to buy, fearing they might miss out on the price surge. This further drives the price up.

Post-Breakout:

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

Failure and Risk Management:

  • False Patterns: Not all patterns succeed. False patterns can occur, leading to trader frustration and potential losses. Proper risk management, such as stop-loss orders, is essential.
  • Reevaluation: If the pattern 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 pattern 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 rising three pattern can help you make more informed trading decisions and better anticipate market movements.