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Downside Gap Three Methods Candlestick Pattern PDF Guide

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The Downside Gap Three Methods is a five-candle bearish continuation pattern, characterized by a large black candle, followed by three smaller bullish candles within its range, and finalized by a black candle that closes lower than the first candle’s close.

A prominent figure in downtrends, the Downside Gap Three Methods pattern reaffirms the bearish momentum, suggesting that attempts to drive prices higher are fleeting and the primary bearish sentiment remains dominant.

Identifying the Downside Gap Three Methods Pattern on a Chart

  1. Prevailing Trend: Begin by looking for an established downtrend. This pattern serves as a continuation signal, so its presence is typically within a bearish context.
  2. Initial Black Candle: The pattern starts with a significant black (or red) candle that contributes to the downtrend’s continuation.
  3. Downside Gap: After the initial black candle, the next day opens with a downside gap, emphasizing the prevailing bearish momentum.
  4. Three Bullish Candles: Following the gap, there should be three smaller bullish (or green) candles. Each of these candles should have a higher close than the previous, yet they should remain entirely within the range of the first black candle. These represent temporary bullish attempts that fail to break the bearish stronghold.
  5. Closing Black Candle: The pattern concludes with another black (or red) candle. This candle should close lower than the first candle’s closing price, underscoring the continuation of the bearish sentiment.
  6. No Overlapping Candles: It’s essential that none of the candles (particularly the three bullish ones) overlap with the initial black candle’s opening gap.

Significance and Indications

The Downside Gap Three Methods pattern holds noteworthy significance in technical analysis, shedding light on the market’s underlying dynamics:

  1. Reaffirmation of Bearish Control: The emergence of this pattern within a downtrend highlights that, despite intermittent bullish attempts (represented by the three small bullish candles), bears still firmly control the market.
  2. Failed Bullish Retracement: The three intervening bullish candles, though signaling a potential retracement or short-term reversal, are effectively negated by the final black candle. This underscores the weakness of bullish sentiment and the strength of the prevailing downtrend.
  3. Continuation Signal: As a continuation pattern, its formation suggests that the existing bearish trend is likely to persist, giving traders a cue to potentially maintain or open short positions.

Big Traders’ Activity during the Downside Gap Three Methods Pattern:

Understanding the actions and intentions of institutional or “big” traders can provide valuable context when analyzing the Downside Gap Three Methods pattern.

  1. Initial Sell-Off: The pattern’s inception with a large black candle often indicates aggressive selling by institutional traders. This drives the price down, ensuring a continuation of the prevailing downtrend.
  2. Gap as a Strategic Pause: The downside gap that follows may represent a brief respite, a pause after the aggressive sell-off. It’s a tactical move, allowing the market to breathe, potentially drawing in contrarian buyers.
  3. Enticing Retail Traders: The three subsequent bullish candles might be viewed as a countertrend move or a potential reversal. Retail traders, hoping to catch an early reversal, might see this as an opportunity to go long. Big traders might be partially closing short positions or even setting traps, allowing prices to drift up momentarily.
  4. Reasserting Dominance: The final bearish candle in the pattern could be the result of big traders re-establishing or adding to their short positions. Witnessing the inability of the price to sustain any bullish momentum, they drive prices lower, capitalizing on the false hope of the retail traders.
  5. Volume as a Clue: Often, the volume during the formation of the first and last candles of the pattern will be significantly higher than during the three bullish candles. This is a clear indication of where the “smart money” or big traders are positioning. Elevated volume on bearish candles suggests strong institutional participation in the sell-off.

Confirmation Tools

Key Support LevelsA break below a prominent support level post-pattern indicates strong bearish continuation. This confirms the pattern’s bearish implications and provides a clear zone for potential price targets.
Break of Pattern’s LowIf the price breaks below the low of the entire pattern (especially the final black candle’s low), it showcases strong bearish momentum. This move often provides a trigger point for short entries.
Volume AnalysisAn uptick in volume during the first and last candles, compared to decreased volume during the three bullish candles, underscores the weight of bearish sentiment and institutional participation.
Technical IndicatorsIndicators like the RSI showing continued bearish momentum or a Moving Average crossover to the downside can strengthen the pattern’s validity, suggesting a continuation of the downtrend.

Optimal Conditions

  • Best Timeframe: While the Downside Gap Three Methods pattern can technically form on any timeframe, it’s most reliable on daily charts. This allows traders to capture more substantial moves and avoid the “noise” present in shorter timeframes.
  • Trading Session: As with most candlestick patterns, the formation is best traded during the primary trading hours for the underlying asset. For equities, this would be the respective stock exchange’s main trading session; for forex, it would be the overlap of the London and New York sessions.
  • Winning Ratio: It’s essential to understand that no candlestick pattern guarantees success. However, when the Downside Gap Three Methods is identified correctly and confirmed with other technical tools, a winning ratio of approximately 60-70% can be expected. As always, individual results will vary based on market conditions and the trader’s skillset.

Trading Strategy for the Downside Gap Three Methods Pattern with Confluence

  1. Entry Point: A trader should consider entering a short position when the final black candle of the pattern closes, especially if it closes below the low of the entire pattern. This confirms the bearish momentum.
  2. Adding Confluence:
    • Technical Indicators: Use tools like the RSI to identify oversold conditions, or a Moving Average crossover signaling further downside.
    • Support & Resistance: Look for the pattern near significant resistance levels. A formation near resistance can strengthen its bearish implications.
    • Volume: High volume on the bearish candles, especially the first and the last, provides added confidence in the pattern’s validity.
  3. Stop-Loss: Place the stop-loss just above the high of the three bullish candles or above a nearby resistance level. This ensures a limited risk if the pattern fails and the price moves upward.
  4. Take Profit: Aim for a take-profit level that’s at least twice the distance from your entry to your stop-loss (a 2:1 risk-reward ratio). You can also use key support levels or technical indicators like Fibonacci retracements to identify potential exit points.


The Downside Gap Three Methods pattern is a potent bearish continuation signal within a prevailing downtrend. While it offers a clear narrative of the market’s bearish momentum, traders should always use it in conjunction with other technical tools and insights to enhance its reliability and improve trade outcomes. Trading with confluence ensures a holistic approach, tapping into multiple layers of market information for more informed decisions.

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