Last Updated on 21 September, 2020 by Samuelsson
Since its introduction to the western world in the late 80s, the candlestick chart has become the preferred method of charting for many traders. Being colorful and easy to read, candlesticks also form patterns that have different meanings. One such pattern is rising three methods.
Rising three methods is a bullish continuation pattern that appears in an ongoing uptrend. The Rising three methods pattern consists of five candles. where the first and last candles are long and bullish, with three small bearish candles in between.
In this article, you’re going to learn more about the rising three methods. We’re going to cover its meaning, definition, and ways to improve the pattern. In addition to this, we’ll also look at some trading strategies that use the rising three methods pattern.
Rising Three Methods Definition & Meaning
For a candlestick pattern to become a rising three methods, it must meet the following criteria:
- The first pattern must be bullish
- The second, third, and fourth candles are small and bearish. They’re confined within the range of the first bullish candle.
- The last, fifth bar is bullish, and closes above the high of the pattern.
A rising three methods indicates that the market has had a small pullback, but still remains strong enough to continue upwards.
What’s Happening in the Market?
All candlestick patterns have their own unique stories to tell. Being representations of market data, they show us how the market has moved, giving us some clues about what actually might have happened.
While it’s hard or nearly impossible to know why a specific candlestick pattern was formed, it’s a really good exercise to try and visualize market forces and how they impact the price.
So let’s try and visualize what might happen when a rising three methods appears in the chart.
As the market is in a bullish trend market sentiment is bullish, and buying pressure prevails. As a result, the market manages to produce a long bullish candle, and it seems like it’s headed for new highs.
However, upon opening the next day, market sentiment shifts over that a pullback could be imminent, given the longevity of the preceding bullish trend. Buying pressure fades, and gives space for sellers to enter the market, who push the market down for the following three days.
Now, on the fourth day, the market still hasn’t managed to close below the low of the first bullish bar. It seems like there still is enough optimism left to avoid a deeper pullback.
Upon realizing the immanent strength of the market, buying pressure increases as market participants become more bullish. As a result, the market forms the fifth bullish candle, that manages to pierce the high of the pattern as a whole. Now that a significant resistance level has been breached, the market is ready to continue higher.
Rising Three Methods Examples
Here follow two examples of the rising three methods pattern.
How to Trade the Rising Three Methods – Improving the Pattern
Even if the rising three methods is believed to work as a buy signal on its own, you want to add some form of filter to ensure that the signal you’re taking indeed is profitable.
In this section, we wanted to show you a couple of filters that we have used successfully in our own trading strategies.
Just remember that what works is highly dependant on the timeframe and market you trade. We recommend that you use backtesting to find out what works best with your particular market!
1. Adding Distance to the Breakout on the Last Bar
As you might remember, the last bullish candle of rising three methods should close above the high of the pattern, and becomes a type of breakout.
Now, the biggest challenge with breakouts is false breakouts. That is those times when a market breaks above the resistance level and then retraces back and continues in the opposite direction. As a matter of fact, false breakouts are the main reason why breakout trading often doesn’t work very well out of the box.
In an attempt to mitigate this issue, many traders choose to add some distance to the breakout level. For example, if you’re watching a breakout over the high of the previous bar, you might want to add $1 or so to the breakout level, to ensure that the market didn’t just happen to get past the breakout level out of random chance.
When deciding how to add the distance to the breakout level, you could use several methods, but one of our favorite methods is to use a multiple of average true range (ATR). So, if we multiply the ATR by 0.2, we add that to the breakout level we’re watching.
Applied to the rising three methods, we take the high of the pattern, and simply add a distance that equals the ATR*0.2. If the last bullish candle manages to pierce not only the high, but also our recently created breakout level, we might want to go long.
2. Using Seasonality & Time Patterns
One thing that a lot of traders don’t notice, is that there are certain periods that are more bullish or bearish than others. Some markets have very pronounced effects on the day level, while others may also have some month based tendencies. For example, heating oil tends to rise as the winter approaches, and fall once the spring arrives, following the demand for heating.
In short, here are the things you should look for:
Certain days of week that perform better or worse than other days.
Parts of the month -Perhaps the first third of the month tends to bring the most returns, while the other are breakeven? Divide the month into two or three parts and try for yourself.
Time of day- Are there certain times of the day were the rising three methods works better or worse?
Knowing the time-based and seasonal effects on the market could be of great help to your trading. For example, if you see a bullish pattern like the rising three methods occurring when the market enters an especially bullish part of the month, you could be a little more certain that a bullish move is coming!
Volatility is one of those concepts that use to work well across many markets. The accuracy of a pattern or trading entry not seldom is tightly knit to the prevailing levels of volatility. You will find that some patterns work very well in high volatility settings, while others show the exact opposite tendency!
There are many ways you could use volatility in your trading, but some of our favorite approaches are:
The ADX indicator- Readings above 20 signal a strong trend, and vice versa. ADX is usually used with its length set to 14, but we have found that it could work well with settings ranging from as low as 3 up to 30. You can read more about the ADX indicator in our complete guide to ADX.
Average True Range(ATR)- The average true range indicator simply is a moving average of the bar ranges. By using the ATR, you get a sense of the average volatility levels in a market, and may compare individual bar ranges to the ATR reading. You may read more in our guide to the ATR indicator.
Bollinger Bandwidth- The width of the Bollinger bands fluctuates with the volatility level of the market. As such, you may divide the upper band by the lower band, to get a ratio that you can use to estimate volatility. In our guide to Bollinger Bands, we cover this and more.
Rising Three Methods Trading Strategies
Now that we have covered how you could improve the rising three methods pattern, it’s time to have a look at a couple of example trading strategies.
The trading strategies presented are not tradable right away, but are listed more to provide inspiration. To become a successful trader you must learn how to build your own trading strategies. And while they could rely on popular concepts, like the rising three methods, you will have to make some tweaks to it yourself.
However, the filters we’re going to use indeed are part of some of our own trading strategies that we trade successfully. In that sense, we believe that the following strategy examples still provide valuable information for an aspiring trader, and urge you not to skip this part!
Trading Strategy 1: Rising Three Methods With Volume Condition.
While the price chart tells us how the market has moved, volume provides some more clues about the conviction with which the market carried out those moves.
We have a lot of strategies that use volume to enhance the original pattern or signal, and it sometimes works remarkably well. We even have some strategies where the main entry signal uses volume only!
Now, if applying volume to the rising three methods pattern, we might want to add a condition for the volume of the last candle. If you remember, the bullish candle that ends the pattern performs a type of breakout over the high of the previous four bars. And if that breakout if coupled with high volume, it might succeed in more cases!
So, the rules for this strategy become that we long if:
- We spot a rising three methods
- The volume of the last bar is greater than the average volume of 10 bars back.
Then we get out of the trade after 5 bars.
Trading Strategy 2: Rising three Methods with RSI
Following on the theme of the previous trading strategy, we might want to use some other conditions to ensure that the breakout is real.
And in this strategy, we’re using the RSI indicator to do that.
If we demand that the RSI performs a breakout at the same time as the price chart, we might stand a better chance!
So, the rules to go long become:
- We have a rising three methods pattern
- The five period RSI makes a new 5-bar high.
And then we exit the trade after 5 bars.
In this article, we’ve had a closer look at the rising three methods pattern. We’ve covered its meaning and definition, and had a closer look at how to improve the pattern for live trading. In addition to this, we’ve also shown you a couple of trading strategy examples, that we hope will provide some good inspiration.
Before we end, we want to give one last important piece of advice.
TEST EVERYTHING YOURSELF BEFORE YOU TRADE IT!
The world of trading is littered with false information and fake trading vendors. It’s imperative that you do your own research before trading anything.
If you want further guidance on how to build trading strategies and validate your trading ideas, we recommend that you check out any of our guides below!
Our guide to backtesting