Downside Gap Three Methods — five-candle bearish continuation pattern

The Downside Gap Three Methods is one of those Japanese candlestick formations that sound intimidating yet describe something simple: a downtrend takes a short break, then carries on falling. Steve Nison classified it as a continuation pattern, not a reversal, and that distinction shapes everything. Below I explain what makes up this five-candle figure and how to trade it sensibly.

What the Downside Gap Three Methods is

It is a five-candle bearish continuation pattern from the Japanese candlestick family. Its skeleton is two long black candles separated by a downward gap — a price range in which no trading took place. Three small rising candles slot in between, filling the gap but never closing it or rising above the high of the first. The name "three methods" refers to those three corrective candles in the middle.

The key intuition: those three rising candles are not the buyers returning, but the sellers taking profits; when the reaction fades they press price lower. It mirrors the bullish Upside Gap Three Methods pattern.

Structure and the mechanics of the gap

"Continuation patterns signal a pause in market activity, during which the market rests before resuming its prior trend." — Steve Nison, Japanese Candlestick Charting Techniques, New York Institute of Finance, 2001

The first candle is a long black body confirming the downtrend. Then comes the downward gap: the second candle opens clearly below the close of the first. This gap gives the formation its character and sets it apart from a plain Falling Three Methods, which has no gap.

The three small candles in the middle are rising but restrained — they move within the gap and never close above the high of the first. The fifth candle is another long black body that drops below the low of the first and confirms the downtrend is back. For how gaps behave, see the guide to trading price gaps.

How to recognise and trade the formation step by step

Step 1 — confirm the downtrend

Start with context. The formation makes sense only within an ongoing downtrend — lower highs, lower lows, price under a falling moving average. In a consolidation the same candles foretell nothing.

Step 2 — verify the gap and the three small candles

Check that there is a downward gap between the two long candles, and that the three in the middle fill it only partly. One boundary condition decides it: none may close above the high of the first candle.

Step 3 — wait for the fifth candle and enter

The signal comes only with the fifth candle, when it closes below the low of the first. You open the short once price drops under that low, not during the reaction — entering before confirmation is the most common way to get caught in a false move.

Entry, stop and targets — a hypothetical example

In the table above, once the fifth candle dropped below the low of the first, to around 17,720 points, you open a short under that low. The stop loss goes above the upper edge of the gap — above the three small candles, slightly above 17,760. That is the natural invalidation level.

Set targets on extensions of the first candle's range, measured downward: the first at one length of that candle, the second around 1.618. With a tight stop above the gap, the risk-to-reward ratio usually lands near one to two. These figures are illustrative, not a prediction.

The most common mistakes when trading this pattern

1. Trading with no downtrend context — in a consolidation these candles are a random move, not a continuation.
2. Accepting candles that close the gap entirely and rise above the high of the first — that is already a reversal.
3. Entering during the three small candles, before the fifth confirms the sellers returning below the low of the first.
4. Setting the stop too tight, inside the gap — the upper edge is tested by wicks, so the stop belongs above the small candles.
5. Hunting for a perfect gap on currency pairs intraday, where genuine price breaks practically never occur.

Why this is a niche pattern on the currency market

The whole figure stands on a price gap, and gaps are born where a market closes at one level and opens at another. On the stock market that is an everyday event, because the session has fixed hours. The currency market trades continuously five days a week — the Bank for International Settlements confirms it is the largest, most liquid market in the world — so price moves smoothly and rarely gaps.

In practice you will see real gaps on currencies mainly at the Sunday open and after surprising macro releases, so a classic Downside Gap Three Methods shows up more often on stocks and indices than on EUR/USD. There, a fuller picture comes from ordinary reversal candlesticks such as the bullish and bearish engulfing, and the three black crows, which need no gap.

Who this pattern is for

Let us be honest: this is a tool for someone who already reads a chart fluently. The gap is a rare condition, rarer still on currencies, so a whole strategy built on it would mean a long wait for signals. Add it to a broader toolkit, and first master recognising the trend and telling continuation patterns apart from reversals, ideally within a grounding in technical analysis.

What to do tomorrow to get comfortable with this pattern

1. Open the daily chart of a stock index such as the DAX or the S&P 500 and review recent downtrends for gaps between sessions — the fastest way to see genuine gaps that currency pairs alone lack.
2. On each candidate check two conditions at once: whether the three middle candles fill the gap only partly, and whether none of them closes above the high of the first candle, the threshold separating continuation from reversal.
3. Mark the entry below the low of the first candle and the stop above the upper edge of the gap, then work out the risk-to-reward ratio a target at one extension of the first candle's range would give you.
4. Place a price alert at the low of the first candle rather than watching for hours, and keep a simple demo journal so that after a dozen trades you can judge this pattern's real success rate honestly.