Upside/Downside Gap Three Methods

The Gap Three Methods is a three-bar Japanese candlestick continuation pattern that signals the likely resumption of the prevailing trend. It’s a variant of the Tasuki Gap: the first two candles form a gap in the trend direction, and the third candle fills that gap by closing within the range of the preceding candles.

Key takeaways

• It is a three-bar candlestick continuation pattern.
• The Upside Gap Three Methods signals bullish continuation.
• The Downside Gap Three Methods signals bearish continuation.
• Use other technical confirmation (price action, volume, indicators) before trading.

Pattern structure

Upside Gap Three Methods (bullish)

Characteristics:
* Market is in an uptrend.
* First bar: large white (bullish) candle with a long real body.
* Second bar: another large white candle that gaps up from the first (no overlapping shadows).
* Third bar: a black (bearish) candle that opens within the real body of the first candle and closes within the real body of the second candle — thereby closing the gap.

Trader psychology:
* The first two candles show strong bullish conviction. Profit-taking or short covering produces the third candle, which fills the gap. Bulls view the gap fill as a pause rather than a trend reversal and expect the uptrend to resume.

Downside Gap Three Methods (bearish)

Characteristics:
* Market is in a downtrend.
* First bar: large black (bearish) candle with a long real body.
* Second bar: another large black candle that gaps down from the first (no overlapping shadows).
* Third bar: a white (bullish) candle that opens within the real body of the second candle and closes within the real body of the first candle — thereby closing the gap.

Trader psychology:
* The first two candles show strong bearish conviction. Short covering or profit-taking creates the third candle, which fills the gap. Bears view the gap fill as a pause and expect the downtrend to continue.

Confirmation and reliability

The Gap Three Methods is relatively rare but can be reasonably reliable when correctly identified. Traders should confirm the pattern with additional analysis:
* Volume (higher volume on continuation candles strengthens the signal)
* Price action (subsequent candles that resume the trend)
* Technical indicators (moving averages, RSI, MACD, etc.)

Example trade setups

Bullish example:
* Enter at the close of the third candle (example price: $16.39).
* Place a stop-loss below the low of the first candle (example: $15.75).

More conservative approach:
* Enter with a buy-stop just above the high of the second candle (example: $16.95) to wait for confirmation the uptrend resumed.
* Use the low of the third candle (example: $16.27) as the stop-loss.

Practical tips

• Ensure the pattern appears in the context of a clear trend.
• Combine with volume and indicator confirmation before executing a trade.
• Define risk with a stop-loss based on candle extremes and use position sizing consistent with your risk tolerance.

The Gap Three Methods highlights a temporary pullback (gap fill) within a trend; treated as a continuation signal when confirmed by additional analysis.