The Upside/Downside Gap Three Methods is a three‑candlestick Japanese candlestick continuation pattern that signals the prevailing trend is likely to resume after a short retracement. It is a variant of the Tasuki Gap pattern in which the third candle completely fills the gap created between the first two candles. The Upside Gap Three Methods is bullish (occurs in an uptrend); the Downside Gap Three Methods is its bearish mirror (occurs in a downtrend).
Source: Investopedia — “Upside/Downside Gap Three Methods” (see reference at end).
Key takeaways
– Structure: three candles; a strong trend candle, a gap in the direction of the trend, then a countertrend candle that fills the gap.
– Interpretation: the gap followed by a gap‑fill shows a temporary pause (profit taking or short covering) rather than a reversal — traders expect the original trend to resume.
– Use with confirmation and risk controls: the pattern is reasonably reliable but rare; confirm it with volume, subsequent price action, and other indicators before trading.
Breaking down the pattern (what to look for)
Upside Gap Three Methods (bullish continuation)
1. Market context: clearly established uptrend (higher highs/lows, trend indicators pointing up).
2. Candle 1: a strong bullish candle (wide real body, close well above open).
3. Candle 2: opens with a gap up and trades bullishly (further upward movement).
4. Candle 3: a bearish or indecisive candle that retraces and completely closes the gap between candles 1 and 2 (fills the gap). The close of the third candle typically does not negate the overall uptrend.
5. Volume: often higher on candles 1–2, lighter on the third (a low‑volume retracement is a bullish sign).
Downside Gap Three Methods (bearish continuation)
1. Market context: clearly established downtrend.
2. Candle 1: a strong bearish candle (wide real body, close well below open).
3. Candle 2: opens with a gap down and continues lower.
4. Candle 3: a bullish or indecisive candle that retraces and completely fills the gap between candles 1 and 2.
5. Volume: heavier on the first two, lighter on the gap‑fill candle if the continuation is likely.
Trader psychology behind the pattern
Upside Gap Three Methods:
– Candle 1: bulls are confident and push price significantly higher.
– Candle 2: gap up shows fresh bullish enthusiasm (new buyers enter, short sellers pressured).
– Candle 3: profit‑taking or short covering causes a retracement that fills the gap; because the retracement happens quickly and gaps are filled, bulls interpret this as a healthy pullback — supply was absorbed and the uptrend can continue.
Downside Gap Three Methods:
– Candle 1: bears dominate and push prices sharply down.
– Candle 2: gap down shows renewed selling pressure.
– Candle 3: a bounce closes the gap (short covering or bulls attempting to step in), but because the bounce fails to reverse the structure, bears view it as a pause before more selling.
Practical trading steps (how traders commonly use the pattern)
1. Identify context: confirm the dominant trend (moving averages, trendlines, higher highs/lows or lower highs/lows).
2. Spot the pattern: verify the three‑candle structure and that the third candle closes/fills the gap.
3. Check confirmation signals:
• Volume: look for heavier volume on the first two candles and lighter volume on the gap‑filling third candle.
• Follow‑through: watch for the next candle after the pattern to resume the trend (e.g., a bullish candle after an Upside Gap Three Methods).
• Other indicators: RSI, MACD, moving averages, or support/resistance levels aligning with the expected move.
4. Entry strategies:
• Aggressive entry: enter at the close of the third candle (the gap‑fill close).
• Conservative entry: place a buy stop above the high of candle 2 (for upside) or a sell stop below the low of candle 2 (for downside) — wait for price to re‑confirm the trend.
5. Stop‑loss placement:
• Aggressive trade stop: below the low of the first candle (stronger support/resistance point).
• Conservative trade stop: below the low of the third (gap‑fill) candle for upside; mirror for downside.
6. Profit targets and position sizing:
• Use risk/reward rules (e.g., target minimum 1.5–3× risk).
• Targets may be set at nearby resistance (for upside) or support (for downside), prior swing highs/lows, or measured moves based on recent range.
• Size the position so that a stop‑loss corresponds to acceptable dollar risk (percent of account).
7. Management:
• Consider moving stop to breakeven after a favorable move of 1R, or trailing stops behind swing lows/highs.
• Monitor volume and price action — if the next candles fail to follow through, exit early.
Example trade (based on an Investopedia example)
– Pattern spotted on Cellectis S.A.:
• Aggressive entry: buy at the close of candle 3 = $16.39.
• Stop‑loss: below candle 1 low = $15.75 → risk per share = $16.39 − $15.75 = $0.64.
• Conservative entry: buy stop above candle 2 high = $16.95.
• Conservative stop: below candle 3 low = $16.27 → risk per share = $16.95 − $16.27 = $0.68.
If a trader’s target is, for example, a nearby resistance at $18.00:
– Aggressive trade reward = $18.00 − $16.39 = $1.61 → reward/risk ≈ 2.5 (1.61 / 0.64).
– Conservative trade reward = $18.00 − $16.95 = $1.05 → reward/risk ≈ 1.5 (1.05 / 0.68).
Tips for improving reliability
– Use volume confirmation: diminished volume on the gap‑fill candle supports the case that the retracement lacks conviction.
– Combine with trend indicators (e.g., 20/50 SMA) and support/resistance.
– Avoid trading patterns that occur just before or after major news events—gaps caused by news can invalidate the normal psychology.
– Require follow‑through: prefer to see at least one candle in the trend’s direction after the pattern before committing large size.
Limitations and risks
– The pattern is rare and can give false signals — always use stops and position sizing.
– In low liquidity markets or around earnings/news, gaps can behave unpredictably.
– Filling the gap does not guarantee continuation — if the subsequent structure breaks trend support (for upside) or resistance (for downside), the pattern fails.
Checklist before entering
– Confirm overall trend.
– Verify three‑candle structure and that the third fills the gap.
– Check volume pattern (heavier on the first two, lighter on the third is preferable).
– Decide on entry style (aggressive vs conservative) and predefined stop and target.
– Compute position size based on max acceptable risk.
– Note key levels (first candle low/high, second candle high/low, nearby S/R levels).
Summary
The Upside/Downside Gap Three Methods is a three‑bar continuation pattern that signals a temporary retracement (gap fill) within a trend rather than a reversal. It offers clear entry and stop placement rules (entry at gap‑fill close or on confirmation above/below candle 2; stops under candle 1 or candle 3), but it is uncommon and should be traded with volume and price‑action confirmation, disciplined risk management, and attention to broader market context.
Reference
– Investopedia, “Upside/Downside Gap Three Methods” —
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.
(a) screen recent charts for this pattern on a symbol you provide, (b) build a printable checklist you can use at the trading desk, or (c) show a step‑by‑step trade plan using different stop/target scenarios.