Upside Gap Three Methods — five candles of bullish continuation

On a stock's daily chart the trend had been rising for weeks, until one morning price opened with a clear gap higher and left an empty space beneath it. For three sessions the market eased back in small red candles, as if catching its breath — but it never closed the gap. The fourth candle pushed up again and broke the previous high. That is the upside gap three methods: five candles that together say not "the rally is over" but "a short pause, and onward".

What the upside gap three methods looks like

The upside gap three methods (in Polish, the metoda trzech świec z luką wzrostową) is a five-candle setup with a clear rhythm. It begins with two long up candles separated by a gap higher — an empty space between the close of the first and the open of the second, where no trading happened at all. Then come three small down candles that partly enter the gap area but do not close it. The whole thing is sealed by a fifth candle: strong, bullish, closing above the high of the second.

One condition matters most: those three middle candles must not undo the whole prior move. They are meant to be small, to nibble at the gap rather than fill it. The gap itself is a separate topic — I explain it in the piece on what a price gap is. Here what counts is that it survives the correction and that demand returns on the fifth candle.

What is really happening in the market

Behind this drawing stands a simple story about the strength of a trend. The first long candle and the gap higher show that demand is strong enough that price jumped over the opening level — someone wanted to buy at once, at a higher price — and the second long candle confirms that eagerness. Then comes a natural reaction: some buyers book profit and a small pullback appears. Those three little red candles are not an assault by sellers but a calm breather, a consolidation in miniature.

The crucial point is that this correction is shallow and does not close the gap, so the market refuses to hand back the ground it won. When demand breaks the high of the setup again on the fifth candle, the uptrend has simply rested and moves on — which is why this is a continuation pattern, not a reversal.

„The shape of a single candle is like a photograph of the market's mood — it shows who really controlled the session when the close arrived." — Steve Nison, Japanese Candlestick Charting Techniques, New York Institute of Finance, 2001.

Why gaps are rare on forex

Here is the catch the candlestick textbooks often skip. Formations like this one were born on stock markets, where the exchange closes in the evening and opens in the morning, and between the two price can jump, leaving a gap. The currency market trades almost without a break from Sunday evening to Friday, with daily turnover of 7.5 trillion dollars (BIS data for April 2022). With that liquidity and continuity, price flows smoothly, without torn-out holes.

In practice you will meet true gaps on forex mainly in two situations: at the reopen after the weekend, when the market reacts to two days of accumulated news, and after surprising macro releases. I cover the first case more fully in the piece on weekend forex trading. So here the upside gap three methods is a niche formation — best watched for on the daily chart around the Sunday open, not during a quiet session.

The trap: rarity and ambiguous results

Before you treat this formation as a ready-made signal, it is worth knowing the numbers. Thomas Bulkowski, who studied thousands of candlestick formations, ranked the upside gap three methods 85th out of 103 by frequency — one of the rarest patterns there is. It appears so seldom that it is hard to build repeatable trading on it.

His tests also produced a surprising result. Although theory calls it a bullish continuation, in the historical data it behaved like a bearish reversal 59 percent of the time — almost a coin toss, with a slight lean toward the downside. That does not make it worthless, but it does mean you must not enter just because five candles lined up in the right shape. I treat it as one element of a broader picture, not a standalone signal.

How to trade the upside gap three methods step by step

The first rule is context before shape. The formation only makes sense inside a clear uptrend; if the trend is flat or has just broken down, the five-candle setup promises nothing. The second rule is confirmation: you do not buy during the three middle candles, because you do not yet know whether the correction will deepen. You wait until the fifth candle closes above the high of the setup, or price breaks that high on the next session.

Your protective stop loss goes below the lower edge of the gap — closing it is the moment the whole story falls apart. Set the target at the nearest meaningful resistance above, or at a level giving at least twice the distance you are risking; if it does not, skip it. For how to plan both levels at once, the piece on stop loss versus take profit helps.

A hypothetical, illustrative example makes this concrete. A pair rising for several weeks opens after the weekend with a gap higher, then eases back over three small red candles that halt just above the gap without closing it. The fifth candle closes back above the high of the setup — that is your long, with the stop below the lower edge of the gap and the target at the first clear resistance above, taken only if that target is at least twice as far as the stop. These are illustrative figures, not a recommendation.

The mirror image on the downside is the downside gap three methods — identical logic, the other way round. And to understand gaps themselves, start with the piece on trading price gaps, the heart of this setup.

What to do tomorrow

1. Open a daily chart and find two or three historical occurrences of the formation. Look for two long up candles with a gap, three small candles that only nibbled it and a fifth that broke the high — then check what happened next before risking real capital.
2. Set a scanner for gaps at the weekend reopen. Since true gaps on forex are rare and appear mainly on Sunday evening and after macro data, focus your watching exactly then, rather than hunting for the formation during quiet intraday sessions.
3. Write down your own rule for entry and invalidation. Commit to paper that you buy only after the fifth candle closes above the setup's high, hold the stop below the lower edge of the gap, require at least twice the risk as reward, and skip the trade entirely without a prior uptrend.
4. Pair the formation with a second confirmation and practise on demo. For a week, catch setups live, check for each whether the trend is genuinely in place, add a reading from another tool and tally the result — recalling that Bulkowski's tests found this pattern ambiguous, so repeatability matters more than one shot.

To organise your candlestick knowledge within a broader course, a good starting point is the technical analysis section on ForexMechanics.com.