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 Upside Gap Three Methods

Market

Industrials (^DJI):

Transports (^DJT):

Utilities (^DJU):

Nasdaq (^IXIC):

S&P 500 (^GSPC):

As of 02/06/2012

12,845 -17.10 -0.1%

5,334 -34.68 -0.6%

450 -1.41 -0.3%

2,902 -3.67 -0.1%

1,344 -0.57 0.0%

YTD

5.1%

6.3%

-3.2%

11.4%

6.9%

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: 1.8%

Mutt Losers: None YTD

Mutt Winners: 2.3%

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 upside gap three methods candlestick is another rare candlestick, so take the performance numbers with a large dose of skepticism. The pattern is supposed to act as a bullish continuation, but I found it really functions as a bearish reversal. However, the reversal rate is what I call "near random." The frequency rank is 85, so you may not be able to find this pattern often enough to consider trading it. However, based on the few samples, it performs quite well in most markets 10 days after the breakout.

Important Results

Discussion

Identification Guidelines

Three Trading Tidbits

Example

Upside Gap Three Methods: Important Results

Theoretical performance: Bullish continuation

Tested performance: Bearish reversal 59% of the time

Frequency rank: 85

Overall performance rank: 27

Best percentage meeting price target: 39% (bull market, up breakout)

Best average move in 10 days: 4.92% (bull market, up breakout)

Best 10-day performance rank: 12 (bull market, up 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.

Upside Gap Three Methods

Upside Gap Three Methods: Discussion

The upside gap three methods candlestick is supposed to act as a bullish continuation pattern, but my tests revealed that it functions as a bearish reversal 59% of the time. I consider that "near random" because you cannot tell with any accuracy which direction the breakout will occur.

The overall performance rank is 27, which is quite high. Looking at the numbers, we find that the best average move 10 days after the breakout is a rise of 4.92% in a bull market. That ranks 12th, but it is well short of the 6% move that I consider good.

Upside Gap Three Methods: Identification Guidelines

Characteristic	Discussion
Number of candle lines	Three.
Price trend leading to the pattern	Upward.
Configuration	Look for two tall white candles in an upward price trend. There should be a gap between them, including between the shadows. The last day is a black candle that fills the gap created by the first two days.

Upside Gap Three Methods: Three Trading Tidbits

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.

Upside gap three methods candles that appear within a third of the yearly low act as reversals most often -- page 876.
Select tall candles for the best performance -- page 873.
Expect a downward breakout -- page 876.

Upside Gap Three Methods: Example

The upside gap three methods candlestick on the daily scale

The upside gap three methods candlestick appears on the daily chart circled in red. The first two candles are white ones, tall and handsome with a gap between them. The last day a black candle fills the gap. That means the price action opens above the lower shadow of the second day and has a low below the upper shadow of the first day.

Imagine shorting the stock on the downward breakout from this upside gap three methods candlestick. Wow! Price moves up leading to the candle and then breaks out downward the day after the pattern completes. Thus, the candle is a reversal of the upward trend. But the downtrend last just a day before beginning its rise to a new high, and a strong trend it is, too, soaring almost 40% in a month.

-- Thomas Bulkowski