Downside Gap Three Methods | RizeTrade

What is the Downside Gap Three Methods Candlestick Pattern?

The Downside Gap Three Methods candlestick pattern is a bearish continuation pattern that appears during a downtrend. It signals a brief pause in selling pressure — often caused by short-term profit-taking — before the market resumes its downward movement.

This pattern typically consists of three candles:

1. The first candle is a large bearish candle, confirming strong selling momentum.

2. The second candle opens with a gap down and closes lower, forming another bearish candle.

3. The third candle is a bullish candle that moves up to fill the gap between the first two candles but fails to close above the high of the first candle.

The pattern shows that buyers attempted to push prices higher, but the rally was short-lived — indicating sellers are still in control and the downtrend is likely to continue.

🔑 Key Takeaways

📉 The Downside Gap Three Methods is a bearish continuation pattern that strengthens an ongoing downtrend.
🕯️ It features two strong bearish candles separated by a downside gap, then a bullish candle that fills the gap.
✅ The third candle’s inability to close above the first candle’s high confirms sustained selling pressure.
🎯 Traders often enter short positions when price breaks below the low of the third candle.
💪 The pattern is more reliable when forming below resistance or key levels, especially with strong volume.

🔍 How Effective Is the Downside Gap Three Methods Pattern?

Many traders recognize the Downside Gap Three Methods as a powerful continuation signal — but how often does it actually deliver consistent results?

🧪 Our Backtest Setup

Statement:
We performed a comprehensive internal backtest using our Candlestick Pattern Performance Matrix to measure how reliably this bearish pattern performs in real-market conditions.

Evidence:

• 1,034 instances tested across forex pairs, equities, and commodities

• Timeframes: 4-hour, daily, and weekly

• Tested under varying volatility environments using real historical data

Insight:
The goal was to isolate how well the pattern sustains bearish momentum after formation — both on its own and when supported by secondary confirmation tools.

📈 Backtest Results

Statement:
The Downside Gap Three Methods showed moderate standalone accuracy, with clear improvement when paired with a momentum or volume-based confirmation.

Evidence:

Insight:
Results indicate a 6–10% gain in accuracy when the pattern aligns with a volume spike, MACD bearish crossover, or RSI divergence.
Traders tracking performance over time can better gauge how often these confirmations enhance follow-through in their own setups.

📉 How to Trade the Bearish Downside Gap Three Methods Candlestick Pattern?

This continuation pattern appears in a downtrend, using a brief bullish rebound to trap buyers before momentum resumes to the downside.

🔍 Entry

Locate two strong bearish candles separated by a clear gap down, confirming sustained selling pressure.
The third candle should turn bullish, retracing part of the gap but failing to close above the first candle’s high — showing temporary profit-taking.
Enter short once price breaks and closes below the low of the third candle, signaling renewed bearish control.

🛡️ Stop-Loss

Set your stop just above the high of the first candle, which acts as a logical invalidation zone.
If price closes above that level, the continuation setup weakens, suggesting possible reversal risk.

🎯 Target

Use the height of the pattern (difference between the first candle’s high and low) to project a measured move.
Alternatively, target the next key support zone or apply a 2:1 to 3:1 reward-to-risk ratio.
Conservative traders may book partial profits as price approaches the previous swing low for disciplined exits.

Trading Strategies that Use the Downside Gap Three Methods

Downside Gap Three Methods with Moving Averages Strategy

Concept
This setup combines the Downside Gap Three Methods pattern with moving averages to confirm trend direction and continuation strength.

Setup
Apply 20-period and 50-period EMAs to your chart.
Ensure price is below both EMAs, confirming a dominant downtrend.
Wait for the Downside Gap Three Methods pattern to form within the bearish structure.

Entry & Exit
Enter short once price breaks below the third candle’s low.
Place the stop-loss above the first candle’s high.
Target the next major support zone or use a 2:1 reward-to-risk ratio.

What Gives It an Edge
EMA alignment confirms the overall trend bias, allowing the pattern to act as a precise continuation trigger within established bearish momentum.

Downside Gap Three Methods with RSI Confirmation

Concept
This approach validates the Downside Gap Three Methods setup using RSI momentum readings, filtering entries for strength and reliability.

Setup
Add the RSI (14) indicator to your chart.
Look for RSI below 50, indicating bearish control.
Identify the Downside Gap Three Methods pattern forming during this momentum phase.

Entry & Exit
Enter short when price closes below the third candle’s low and RSI continues to decline.
Set a stop-loss above the first candle’s high.
Take profit at the nearest support level or maintain a 2:1 risk/reward ratio.

What Gives It an Edge
RSI confirms sustained momentum, helping traders avoid false continuation signals during temporary pauses in a downtrend.

Real Trading Example: Downside Gap Three Methods on AMD

In AMD (Advanced Micro Devices), price trended downward from $125 to $110:

• Day 1: A large bearish candle closed at $111.

• Day 2: The next session gapped down, opening at $110 and closing at $108.50.

• Day 3: A small bullish candle opened at $108.60 and closed at $110.20, partially filling the gap but failing to close above $111.

Trade Setup:

• Entry: Break below $108.50 (third candle’s low)

• Stop Loss: Above $111 (first candle’s high)

• Take Profit: $104–$105 (next support level)

The trade confirmed a bearish continuation, aligning with strong trend momentum and favorable risk/reward dynamics.

Best Indicators to Combine with the Downside Gap Three Methods

Common Mistakes and How to Avoid Them

Recognizing Failure Signals

• Avoid trading if the third candle closes above the first candle’s high — this invalidates the pattern.

• Be cautious of false breakouts in low-volume or sideways markets; wait for confirmation via volume or indicator alignment.

Tips for Trading the Downside Gap Three Methods

• Trade only in established downtrends; this is a continuation, not a reversal pattern.

• Always wait for a confirmed breakout below the pattern before entering.

• Maintain strict risk management, keeping risk under 1–2% of total capital.

• Combine with trend filters like EMAs or ADX for additional confirmation and higher accuracy.

📉 Downside Gap Three Methods vs. Falling Three Methods

Both Downside Gap Three Methods and Falling Three Methods are bearish continuation patterns, but they differ in structure, speed, and the depth of consolidation before the trend resumes.

🔍 Core Difference

Statement:
While both signal a pause within a downtrend, the Downside Gap Three Methods forms over a short period with a gap-driven retracement, whereas the Falling Three Methods develops more slowly through multiple corrective candles.

Evidence:

Insight:
The Downside Gap Three Methods pattern represents a swift pause and quick resumption of bearish momentum — ideal for traders seeking short continuation setups.
In contrast, the Falling Three Methods shows a more measured consolidation, often signaling that sellers are regrouping before the next major leg lower.
Together, they illustrate two distinct phases of trend continuation: immediate momentum follow-through versus structured pullback consolidation.

For practical trade refinement, traders can analyze performance history to identify which setup better aligns with their preferred timeframe and risk tolerance.