A beginner’s guide to understanding rising three methods

As a trader, your primary purpose in the stock market is to make profits. You put some money into the market, earn a profit, and then reuse the profit to make more money. 

However, this hypothetical scenario is not always possible. The stock market is volatile, and technical analysis can help you avoid being affected by it.

Today, we will go over the ‘Rising Three Method’ in depth to assist you in choosing the best trade.

What is the Rising Three Method?

The Rising Three Method candlestick is a bullish candlestick pattern used in trading to predict the continuation of an uptrend. On a chart, this pattern is identified by a sequence of five candles. 

Traders view this pattern as a sign that, despite a brief slowdown, the market’s upward momentum remains strong, and the trend is expected to resume. 

Here is how you can recognise the Rising Three Methods candlestick pattern.

• Strong start: The pattern begins with a large green candle. This represents a tenure where the stock price surged significantly, showing that buyers are in control and the market is bullish.

• Short pause: After the strong start, you will see a series of up to three small red candles. These represent periods where the stock price took a slight dip. However, these dips are not strong enough to change the overall upward trend.

• Staying within bounds: The small red candles are vital because they remain within the high and low range set by the first large green candle. This means that while there are some sales and the price dips a bit, it doesn’t fall below the starting point of the uptrend.

• Resumption: The pattern is completed with another sizeable green candle. It shows that the buyers have come back with even more strength. The price not only recovers from the small dips but also closes higher than the first green candle’s close, confirming the continuation of the uptrend.

• Confirmation: For the pattern to be valid, it must occur during an existing uptrend. The final green candle should close above the first candle’s close, confirming that the uptrend is resuming.

Strategies to trade bullish rising three methods pattern

The five best strategies you can deploy in combination with the rising three-method candlestick pattern are: 

1. Pullback method on naked charts

Pullback means a temporary reversal in the price of an asset within an ongoing trend. When applied to Naked Charts, which are price charts without any indicators, this strategy focuses on identifying these pullbacks to make trading decisions.

• Look for a strong upward movement in the price chart without any indicators.
• Spot the Rising Three Methods pattern.
• Wait for the pullback. After the initial bullish surge, the price will often pull back slightly due to traders taking profits. That is where the three smaller bearish candles come in.
• As the fifth candle forms and surpasses the first candle’s high, this indicates that the buyers are back in control. You would enter a long position here.
• Place a stop loss below the lowest point of the pullback. Your take profit can be set at a level that’s a multiple of the distance from the entry point to the stop loss.

2. Use resistance level

The best way to employ the three rising method patterns is by using resistance and support levels.

Here is the guide:

• Mark the resistance levels on your chart. These are price points where selling pressure previously overcame buying pressure, halting the price rise.

• If the Rising Three Methods pattern forms near a resistance level and the final candle breaks through this level, it suggests a strong continuation of the trend.

• Enter a long position when the price breaks above the high of the last candle in the pattern.

3. Use moving average 

Here is a simplified guide on how to trade this pattern with moving averages:

• Identify an Uptrend: Look for a stock or asset consistently making higher highs and higher lows. The price should be above a commonly used moving average, for example, the 50-day or 200-day.

• Spot the pattern

• Entry Point: Enter a long position (buy) when the price breaks above the high of the last bullish candle. This suggests that the uptrend is likely to continue.

• Set Stop-Loss: Place a stop-loss order below the low of the smallest bearish candle within the pattern to limit potential losses if the trend reverses.

• Take Profit: Set a take-profit level where you expect the next resistance or a significant price level that could halt the uptrend.

4. Use RSI Divergences

You can pair this method with “RSI Divergences” to confirm the trend’s strength. Here are the steps involved.

• Look for a clear uptrend on your chart, where prices consistently make higher highs.
• Find the Rising Three Methods pattern.
• Utilise the Relative Strength Index to determine divergences. A bullish divergence arises when the price is lower, but the RSI makes a higher low, indicating a weakening downward momentum.
• Consider entering a trade after the final bullish candle closes above the rest, confirming the pattern.

5. Use Fibonacci

This strategy combines the predictive power of candlestick patterns with the mathematical precision of Fibonacci levels.

• Look for a strong upward price movement, confirmed by higher highs and higher lows.
• Utilise the Fibonacci retracement tool to mark lines from the low to the high of the uptrend. The key Fibonacci levels are 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
• After the initial green candle, the price will often pull back to a Fibonacci level. This is where the three small red candles come into play.
• The final green candle, which closes above the first green candle, signals the continuation of the uptrend. This is your potential entry point.
• Place a stop-loss order below the lowest point of the three red candles to limit potential losses.
• Set a take-profit target at a previous high or use Fibonacci extension levels to determine a potential exit point.

Conclusion

The Rising Three Method is a valuable tool for traders to identify bullish trends and make informed trading decisions. You can enhance your success in the market by understanding its formation and implementing strategies. Remember, consistency and patience are key to effectively utilising this pattern to overshadow the complexities of stock trading. To learn more, read StockGro blogs!

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