What Is 'Upside/Downside Gap Three Methods'

The gap three methods is a three-candle reversal pattern that appears on candlestick charts.

Breaking Down 'Upside/Downside Gap Three Methods'

The upside gap three methods is a bearish reversal pattern with the following characteristics:

  1. The market is in an uptrend.
  2. The first candle is a white candle with a long real body.
  3. The second candle is a white candle with a long real body where the shadows over both candles don’t overlap.
  4. The third candle 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 is a bullish reversal pattern with the following characteristics:

  1. The market is in a downtrend.
  2. The first candle is a black candle with a long real body.
  3. The second candle is a black candle with a long real body where the shadows over both candles don’t overlap.
  4. The third candle 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.

The gap three methods is a fairly accurate chart pattern, but it doesn't occur that frequently in the real market environment. When it is identified, traders should apply other forms of technical analysis to confirm the reversal, including chart patterns and technical indicators.

Upside Gap Three Methods Trader Psychology

The market is engaged in an active 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 bull confidence while putting bears on the defensive. Their caution is justified because the second candle opens with an up gap and healthy buying pressure that lifts the security to a new high.  Bulls get complacent at the closing bell, which exhibits little or no selling pressure. They get trapped on the third candle. with a down gap and downside follow through that fills the second bar gap and continues in a trend reversal. 

Downside Gap Three Methods Trader Psychology

The market is engaged in an active 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 bear 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.  Bears get complacent at the closing bell, which exhibits little or no buying pressure. They get trapped on the third candle with an up gap and upside follow through that fills the second bar gap and continues in a trend reversal. 

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