The Falling Three Methods Candlestick Pattern is used by Manual Traders, but does it actually deliver profits?

Falling Three Methods is a popular Candlestick Pattern and it is taught by educators and featured on websites providing knowledge to those with the patience to learn.  This is the first in a series of articles that cover popular Technical Analysis methods and are backtested to see how they handle different scenarios.  Often, Technical Analysis strategies would entail more than just one criteria, but in this case each Technical Analysis Method (Falling Three Methods) is being isolated and tested alone based on how it is supposed to be used and even some experimental ways of using them.

How the Falling Three Methods Candlestick Pattern will be tested.

About the Modeling Quality

In MetaTrader 4, there is the Strategy Tester and it backtests trades that have taken place in the past.  Is it the most accurate method of backtesting?  No, unless you are using "real ticks", which may still fall out of alignment with the particular broker and it becomes a complete mess.  So the modeling quality rates with what is considered a 'tick' in MT4 is going to be 90%, which should provide a good enough simulation as long as the backtested strategy is not scalping or too sensitive to news events where fluctuations within a minute can create whipsaws.  It is generally a good enough modeling quality rate for just about anything else.

Multiple Results with Different Time Frames, Trading Styles and Instruments

The following Time Frames will be used:

  • 5 Minute
  • 1 Hour
  • 4 Hour
  • 1 Day

Styles featured will include:

  • 140 pip Take Profit and Stop Loss of 100 pips
  • 140 pip Take Profit with a 20 pip Stop Loss
  • 140 pip Take Profit with a 20 pip Stop Loss and a 40 pip Trailing Stop
  • 140 pip Take Profit with a 60 pip Stop Loss
  • 80 pip Take Profit and Stop Loss of 100 pips
  • 80 pip Take Profit with a 20 pip Stop Loss
  • 80 pip Take Profit with a 20 pip Stop Loss and a 30 pip Trailing Stop
  • 80 pip Take Profit with a 60 pip Stop Loss
  • 20 pip Take Profit and Stop Loss of 100 pips
  • 20 pip Take Profit with a 20 pip Stop Loss
  • 20 pip Take Profit with a 20 pip Stop Loss and a 15 pip Trailing Stop
  • 20 pip Take Profit with a 60 pip Stop Loss

Used as a continuation pattern and an all-encompassing pattern for testing purposes.

Instruments Used will Include:

  • EURUSD
  • USDJPY
  • AUDUSD
  • EURGBP

What range of time will be the Falling Three Methods Pattern be tested?

The Falling Three Methods Candlestick Pattern will be tested during the period of June 1, 2015 to May 31, 2018.  Is it necessarily an adequate time frame to test?  Possibly not, but there are a wide array of market environments.

What is The Falling Three Methods Pattern? 

This candlestick pattern is a bearish continuation pattern that teases over the course of five candles a reversal, but is in fact a continuation of the bearish trend.  The three rising candles in the middle are simply not enough to overtake the large bearish candle, which engulfs them.  Each candle has a higher high, higher low, higher close, and higher open.  The open of the final candle may have a higher open than the previous candle's high, but in all likelihood it is easier to judge it based on it having a higher open than the close of the previous candle.  The final candle must close below the close of the first candle and have a low below the low of the first candle.

For all of the attention this pattern receives, it is considered to be a rather rare phenomenon.

EURUSD

No instances of any trades triggered during the time period using a 5 Minute Chart, 1 Hour Chart, 4 Hour Chart.

The Falling Three Methods Candlestick Pattern did not even appear for EURUSD under the testing parameters.  Maybe this elusive Chart Pattern will appear on the next currency pair.

USDJPY

It's another case of the pattern not taking place during the three year span for any of the Time Frames.

AUDUSD

No Falling Three Methods Candlestick Patterns are found within the testing parameters.  This is a tough find.

EURGBP

More of the same for this non-USD currency pair.  No sightings of this candlestick pattern.

What can be concluded?

Those who are looking for the Falling Three Methods Candlestick Pattern are wasting their time.  They are extremely rare occurrences and anyone looking to trade candlesticks in the FX Market is simply better off trying other candlestick patterns.