Downside Gap Three Methods – Bearish Continuation Pattern

Definition

The Downside Gap Three Methods is a 5-candle bearish continuation pattern. It confirms the current downtrend will resume after a brief consolidation. This pattern often appears in strong downtrends and provides a powerful signal to enter short positions.

How to Identify

• Candle 1: Long bearish candle, large body, showing strong selling pressure.
• Candle 2: Opens with a gap down (below candle 1), small body, usually bullish or doji. The gap is not filled.
• Candle 3: Moves up but remains within the gap, small body.
• Candle 4: Similar to candle 3, continues higher but does not reach the open of candle 1.
• Candle 5: Long bearish candle, closes below the low of candle 1, confirming bearish continuation.

How to Trade

• Entry: After candle 5 closes below the low of candle 1, enter a sell (short) position.
• Stop Loss: Place above the high of candle 1 (or above the highest high of the three small candles for a tighter stop).
• Take Profit: Use the height from candle 1 to candle 5 as a target or the nearest support level.

Real Example

On EUR/USD daily chart during a downtrend: a long bearish candle (Day 1), gap down (Day 2) with three small up candles (Days 3-5), then a final bearish candle (Day 6) closing below Day 1's low. Trader shorts, stop loss above Day 1 high, target at next support 50 pips away. Price drops 70 pips.

Common Mistakes

• Mistaking it for a reversal pattern when the small candles fill the gap.
• Entering before candle 5 closes, leading to false signals.
• Placing stop loss too tight, getting stopped out by a minor retracement.

Check volume (if available) and higher timeframes to increase reliability.