The falling three methods are a common pattern in technical analysis. It usually appears in a downward trend, indicating that prices may continue to fall.
Simply put, from a technical pattern perspective, the falling three methods are a continuous bearish pattern.
The appearance of the falling three methods pattern indicates that there is still selling pressure in the market and prices may continue to fall.
It shows the active participation of sellers during price rebounds and their willingness to regain control of the market. This pattern is often interpreted as a sell signal. Investors may consider selling stocks they hold.
Generally speaking, the characteristics of the falling three methods pattern are as follows:
1. The pattern begins with a relatively large negative line:
The falling three methods pattern starts with a relatively large negative line, indicating strengthening bearish forces and falling prices. This large negative line represents the starting point of the downward trend.
2. Next are three or more consecutive small positive lines:
After the large negative line, there are three or more consecutive small positive lines. These small positive lines represent short-term rebounds or consolidations in prices, indicating that bullish forces have strengthened slightly but still remain below the large negative line. The entities of the small positive lines are usually quite small.
3. In the middle of the pattern is a relatively large negative line:
After the consecutive small positive lines, a relatively large negative line appears again. This negative line is usually longer than the previous small positive lines, indicating that sellers have regained control and prices have broken through the lows of the previous small positive lines, confirming the continuation of the downward trend.
Here is an example to help you better understand the falling three methods:
Coca-Cola (KO):
In August 2022, Coca-Cola (KO) showed a falling three-method technical pattern in a volatile trend, indicating that Coca-Cola's selling forces were strengthening and stock prices might fall. Subsequently, Coca-Cola's stock price continued to decline.
When making investment decisions using the falling three methods, you also need to pay attention to the following points:
1. Confirm the downward trend:
The falling three methods is a rebound pattern in a downward trend. Investors should first confirm whether the overall trend of the market is downward. Only in a bear market do the falling three methods have higher reliability.
2. Observe trading volume:
Changes in the trading volume are also an important factor in the falling three methods pattern. In the confirmation process of the pattern, the larger negative lines are usually accompanied by higher trading volume, while the subsequent small positive lines gradually decrease in trading volume. You should pay attention to changes in trading volume to confirm market participants' emotions and strengths.
3. Determine entry and exit points:
The appearance of the falling three methods can be seen as a sell signal. However, the specific entry and exit points should be determined based on individual investment strategies and risk tolerance. It is recommended to use stop-loss orders and target prices to manage risks and profits.