Gap Three Methods: Definition, Application, and Trading Strategies
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Summary:
The Upside/Downside Gap Three Methods are three-bar Japanese candlestick patterns indicating bullish or bearish continuation of trends. This article explains the characteristics of both patterns, trader psychology behind them, and provides a practical trading example.
What is the upside/downside gap three methods?
The Gap Three Methods is a three-bar Japanese candlestick pattern that indicates a continuation of the current trend. It is a variant of the Upside Tasuki Gap pattern, but the third candle completely closes the gap between the first two candles.
Breaking down the upside/downside gap three methods?
The upside gap three methods
The Upside Gap Three Methods pattern suggests a bullish continuation of the trend. It exhibits the following characteristics:
- The market is in an uptrend.
- The first bar is a white candle with a long real body.
- The second bar is a white candle with a long real body where the shadows over both candles don’t overlap.
- The third bar is a black candle that has an open within the real body of the first candle and a close within the real body of the second candle.
The downside gap three methods
The Downside Gap Three Methods pattern suggests a bearish continuation of the trend. It exhibits the following characteristics:
- The market is in a downtrend.
- The first bar is a black candle with a long real body.
- The second bar is a black candle with a long real body where the shadows over both candles don’t overlap.
- The third bar is a white candle that has an open within the real body of the second candle and a close within the real body of the first candle.
Upside gap three methods trader psychology
Suppose the market is engaged in a current uptrend. The rally continues on the first candle in a healthy session with the close well above the open, generating a wide range real body. This increases the bull’s confidence, while putting bears on the defensive. Their caution is justified because the second candle opens with a gap up and healthy buying pressure that lifts the security to a new high. Profit-taking causes the third candle to close the gap between the first and second candles. The bulls assume the uptrend will resume now that the gap has filled.
Downside gap three methods trader psychology
Now suppose the market is engaged in a current downtrend. The decline continues on the first candle in a weak session with the close well below the open, generating a wide range real body. This increases the bear’s confidence, while putting bulls on the defensive. Their caution is justified because the second candle opens with a down gap and active selling pressure that drops the security to a new low. Short covering causes the third candle to close the gap between the first and second candles. The bears assume the downtrend will resume now that the gap has filled.
Practical example of trading a gap three methods pattern
Paul has spotted an Upside Gap Three Methods pattern on the chart of Cellectis S.A. and wants to use the formation to enter a long position in the direction of the trend and set his risk parameters. He could execute a trade at the closing price of the third candle at $16.39 and place a stop-loss order below the first candle’s low at $15.75. David may decide to take a more conservative approach and enter a buy stop order slightly above the second candle’s high at $16.95, waiting for confirmation that the uptrend has resumed. He could then use the low of the third candle at $16.27 as a stop-loss point.
Frequently asked questions
What are the characteristics of the upside gap three methods pattern?
The Upside Gap Three Methods pattern occurs in an uptrend and consists of three bars: two white candles and one black candle, where the third candle closes the gap between the first two.
How does trader psychology influence the upside gap three methods pattern?
Bulls gain confidence as the uptrend continues with strong buying pressure, leading to the formation of the pattern. They anticipate the uptrend’s continuation after the gap is filled by the third candle.
What is the significance of the downside gap three methods pattern?
The Downside Gap Three Methods pattern indicates a bearish continuation in a downtrend. It comprises two black candles followed by a white candle, where the third candle closes the gap between the first two.
How reliable are the gap three methods patterns?
While the Gap Three Methods patterns are considered reasonably reliable, traders should not rely solely on them for trading decisions. It’s essential to use them in conjunction with other technical analysis tools for confirmation.
Can the gap three methods patterns be applied to different timeframes?
Yes, the Gap Three Methods patterns can be observed on various timeframes, from intraday charts to longer-term charts. However, traders should adjust their trading strategies accordingly based on the timeframe.
Are there any variations of the gap three methods patterns?
Yes, there are variations of the Gap Three Methods patterns, such as the Upside Tasuki Gap and the Downside Tasuki Gap. These patterns may exhibit similar characteristics but with slight variations in candlestick formations.
Key takeaways
- The Upside/Downside Gap Three Methods are three-bar Japanese candlestick patterns indicating bullish or bearish continuation of trends.
- Traders should apply other forms of technical analysis to confirm the pattern’s validity.
- Understanding trader psychology behind these patterns can help anticipate market movements.
- A practical trading example illustrates how traders can utilize the Gap Three Methods pattern.
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