Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30 years of stock market experience and widely regarded as a leading expert on chart patterns. His four books, including the best selling Encyclopedia of Chart Patterns, have been translated into seven languages. He may be reached at

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Bulkowski's Downside Gap Three Methods

Market

Industrials (^DJI):

Transports (^DJT):

Utilities (^DJU):

Nasdaq (^IXIC):

S&P 500 (^GSPC):

As of 02/07/2012

12,878 33.07 0.3%

5,323 -10.92 -0.2%

452 2.11 0.5%

2,904 2.09 0.1%

1,347 2.72 0.2%

YTD

5.4%

6.0%

-2.7%

11.5%

7.1%

Tom's Targets Overview: 02/03/2012

13,100 or 12,400 by 02/15/2012

5,500 or 5,150 by 02/15/2012

470 or 440 by 02/15/2012

3,100 or 2,800 by 02/15/2012

1,375 or 1,300 by 02/15/2012

Test Portfolios and CPI

Indus. strength: 2.4%

Mutt Losers: None YTD

Mutt Winners: 2.5%

Wilder RSI: None YTD

CPI:

on 12/20/2011

In my book, Encyclopedia of Candlestick Charts, pictured on the right, I explore the entire range of candlestick patterns from abandoned babies to windows (not exactly A to Z, but you get the idea), in both bull and bear markets, using almost 5 million candle lines in the tests.

The book takes an in-depth look at 103 candlestick patterns and reports on behavior and rank (3 types: reversal rate, frequency, and overall performance), identification guidelines, performance statistics (tables of general statistics, height, and volume), trading tactics (tables of statistics on reversal rates and performance indicators), and wraps each chapter with a sample trade. I share a sliver of that information below. If you like what you read here, then you will love the book. Help support this website and buy a copy by clicking on the above link.

The downside gap three methods candlestick behaves in theory (as a bearish continuation) differently from reality (it is a bullish reversal). The overall performance after the breakout is quite good, but with a frequency rank of 84 out of 103 candle patterns, where 1 is most popular, it is very rare.

Important Results

Discussion

Identification Guidelines

Three Trading Tidbits

Example

Downside Gap Three Methods Important Results

Theoretical performance: Bearish continuation.

Tested performance: Bullish reversal 62% of the time

Frequency rank: 84

Overall performance rank: 26

Best percentage meeting price target: 56% (bear market, down breakout)

Best average move in 10 days: -5.02% (bear market, down breakout)

Best 10-day performance rank: 8 (bull market, down breakout)

All ranks are out of 103 candlestick patterns with the top performer ranking 1. "Best" means the highest rated of the four combinations of bull/bear market, up/down breakouts.

The above numbers are based on hundreds of perfect trades. See the glossary for definitions.

Downside Gap Three Methods

Downside Gap Three Methods Discussion

The downside gap three methods candlestick pattern is supposed to be a bearish continuation pattern, but testing shows that it acts as a bullish reversal 62% of the time. With a frequency rank of 84th, you may never know because it won't appear anytime soon.

The overall performance rank is 26, which is quite respectable. The best average move 10 days after the breakout is a drop of 5.02% in a bear market. I consider moves of 6% or higher to be good ones, so this does not make the grade. Nevertheless, the candlestick pattern ranks 8th for performance over 10 days after a downward breakout in a bull market. That is very good. A check of the numbers shows that the downside gap three methods candlestick does best after downward breakouts. Avoid those with upward breakouts, especially in a bear market.

Identification Guidelines for Downside Gap Three Methods

Characteristic	Discussion
Number of candle lines	Three.
Price trend leading to the pattern	Downward.
Configuration	Look for two long black bodied candles in a downward price trend. The second candle should have a gap between them (shadows do not overlap). The last day is a white candle that opens within the body of the prior day and closes within the body of the first day, closing the gap between the two black candles.

Three Trading Tidbits for Downside Gap Three Methods

If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on. The pages refer to the book where the tips appear.

Downside gap three methods candles that appear within a third of the yearly high act as reversal most often -- page 296.
Look for the candle pattern to appear near the end of an inverted and ascending scallop -- page 294.
The downside gap three methods breaks out upward most often -- page 296.

Downside Gap Three Methods Example

The downside gap three methods candlestick on the daily scale

The downside gap three methods candlestick appears circled in red on the daily scale. The first two candles are black with tall bodies and a gap between them, and that includes the shadows. In other words, the two candles do not overlap. The third day is a white candle that opens within the body of the second candle but closes within the body of the first candle, closing the area gap.

In this example of the downside gap three methods candlestick, the stock breaks out downward when price closes below the bottom of the candlestick. Price continues lower, too but does not drop much. Thus, this downside gap three methods candlestick acts as a bearish continuation pattern.

-- Thomas Bulkowski