What is Sanku (Three Gaps Pattern)?
Sanku (Three Gaps pattern) is the Japanese word for a candlestick pattern that consists of three individual gaps located within a well-defined trend. The candles—with gaps between them—may be consecutive, but they don't need to be. There may be several candles, then a gap, and so on. The appearance of the pattern suggests a trend may be nearing exhaustion and traders should be on the lookout for signs of a reversal.
A Sanku pattern can occur in a downtrend or an uptrend.
- The Rising Three Gaps pattern occurs during an existing uptrend and is formed when there are three gaps higher separated by rising candles.
- The Falling Three Gaps pattern occurs during an existing downtrend and is formed when there are three gaps lower separated by declining candles.
- The gaps may be separated by several candles, not just one.
- The pattern signals the trend may be nearing exhaustion. The latest gap being filled by movement in the opposite direction is a sign of a potential reversal.
What Does Sanku (Three Gaps Pattern) Tell You?
The pattern shows very strong price action, but that may not be sustainable for long. The three gaps higher are showing aggressive buying of the security. As the number of buyers left to buy starts to dwindle, former buyers turn into sellers looking to take profit and avoid losses.
A Rising Three Gaps pattern must occur in an existing uptrend.
The Sanku pattern warns that things may be getting overheated. It is not a definitive sign of a reversal. For a reversal to occur there needs to be an actual price reversal. When the third (highest) gap is filled, some traders consider that to be a warning that a reversal to the downside is in progress. Filling the gap, in this case, would be when the price drops below the entire third gap.
The same concept applies when a Three Gaps pattern occurs in a downtrend. It could indicate sellers will soon be exhausted. When the price moves up through the third gap, that could indicate the reversal is underway.
The pattern is a short-term one, typically covering several candles. The pattern doesn't necessarily indicate a longer-term trend change, although sometimes it may when the Sanku takes the form of a climax top or bottom.
Examples of How to Use the Sanku (Three Gaps) Pattern
The Sanku pattern is created by a bull (up) candle, a gap higher, a bull candle, a gap higher, a bull candle, and then another gap higher and another candle.
Each of those "candles" could consist of multiple candles, although in fast moving markets it is typically only one or two.
Even two gaps with large price moves between can signal things are nearing exhaustion.
For traders that are long and wanting to lock in profits, the pattern signals them to trail their stop losses. Stop losses can be trailed up behind the recent candle low, or the low of the most recent gap, for example. Traders may even wish to trail them up behind an intraday support level.
When the price drops below the most recent gap higher, that could signal the tide is shifting. The price is starting to pull back. This may be a temporary pullback or it may indicate a long-term top in the price. Which it will be is hard to predict, although the size and euphoria of the pattern is a good indicator.
The more the price advances over the few days of the pattern, relative to what is normal, the greater the chance of a climax top which could be followed by a long-term decline in price. Climax tops are accompanied by very high volume, much greater than average.
Some traders may initiate short positions once a reversal begins. A stop loss could be placed above the recent candle, or above the high of the entire pattern.
Candlestick patterns don't have profit targets. Some other exit strategy is required for locking in profit on trades based on the pattern.
A Sanku pattern occurred on the chart of Nvidia Corp. (NVDA). The price had already been rising when the price jumped higher, and then proceed to gap and rise multiple times.
The price dropping below the third gap was a sign of trouble for the buyers. It signaled a good exit point on longs. In this case, a short trade could have also worked profitability.
The Difference Between the Sanku (Three Gaps) Pattern and Three White Soldiers
Three White Soldiers is a reversal pattern that occurs after a downtrend when the price starts rising again. It is three large upward candles that show sentiment is shifting in the downtrend and a new uptrend may be underway. A falling Three Gaps pattern occurs during the downtrend.
Limitations of the Sanku (Three Gaps) Pattern
Not all Sanku patterns will be followed by a reversal. Consecutive small gaps can occur in uptrends (or downtrends) for long stretches. Exiting long positions in an uptrend based on such patterns may mean exiting prematurely and leaving a lot of money on the table as the price continues higher.
Therefore, interpreting which three gap patterns are important is subjective. The bigger the price moves and gaps involved, the more important that pattern is.
Overall context and outlook is also important. The Sanku pattern may result in only a minor pullback, or a full trend reversal could follow.
The pattern doesn't have a profit target. Some other means of analysis is required in order to determine when to get out of trades based on the pattern.