Upside Gap Three Methods Explained & Backtested (2024)

The upside gap three methods is a three-bar bullish continuation Japanese candlestick pattern that historically leads to volatility.

Traders practicing traditional upside gap trading methods will likely have downside gaps in their portfolio profits by being on the wrong side of history.

Keep reading to learn everything you need about the upside gap three methods.

What Is an Upside Gap Three Methods Candlestick Pattern?

Upside Gap Three Methods Candlestick Pattern Illustration © Analyzing Alpha
Upside Gap Three Methods Candlestick Pattern Illustration

The upside gap three methods is a three-bar bullish continuation pattern. The pattern is supposed to suggest a bullish action after a retracement, but the data tells us otherwise.

Let’s learn how to identify the upside gap three methods, and then we’ll move on to how the data tell us to trade this three-bar pattern on our candlestick charts.

How to Identify the Upside Gap Three Methods Candlestick Pattern

Upside Gap Three Methods Candlestick Pattern on the Apple (AAPL) June 11th, 2020 daily chart
Upside Gap Three Methods Candlestick Pattern on the Apple (AAPL) June 11th, 2020 daily chart

A valid upside gap three methods candlestick pattern requires:

  • The first candle is bullish.
  • The second candle is bullish and gaps up.
  • The third candle is bearish, opens with the second candle’s body, and closes within the first candle’s real body.
  • The upside gap three methods must occur during an uptrend.

The upside gap three methods pattern occurred on Apple’s (AAPL) daily chart on June 11th, 2020.

The price is in a bullish trend as the upside gap is above the fifty-day simple moving average (SMA). There’s a bullish candle, a second bullish candle that gaps up, and a third candle that opens within the previous and closes in the first candle’s real body, fulfilling the upside gap requirements.

Now that we know how to identify this three-candle pattern, what does the data tell us about the best upside gap three methods trading strategies?

How to Trade the Upside Gap Three Methods Candlestick Pattern

Professional traders should trade the upside gap three methods using bullish mean reversion strategies in the stock and crypto markets and a short-term bearish mean reversion strategy in the forex market using history as our guide.

Before we learn the optimal trading strategies, let’s know how most traders lose money when trading the upside gap three methods.

Upside Gap Three Methods Bullish Continuation Trade Setup

Upside Gap Three Methods Bullish Continuation Trade Setup on the Nvidia (NVDA) September 23rd, 2020 daily chart
Upside Gap Three Methods Bullish Continuation Trade Setup on the Nvidia (NVDA) September 23rd, 2020 daily chart

The price is above the fifty-day simple moving average, which we consider a bullish uptrend. We see a bullish candle, a bullish candle gapping up, and a bearish candle that opens within the second and closes within the first, fulfilling the pattern’s requirements.

With the upside gap pattern identified, traders enter long at a break of the third candle’s high while placing a stop loss below the first candle’s low.

Traditional technical analysts going long on the three methods that occurred on NVidia’s September 23rd, 2020 daily chart made profits against history’s advice. 

Data-driven traders listening to history do it differently.

Upside Gap Three Methods Bullish Mean Reversion Trade Setup

Upside Gap Three Methods Bullish Mean Reversion Trade Setup on the Bitcoin (BTCUSD) April 6th, 2021 daily chart
Upside Gap Three Methods Bullish Mean Reversion Trade Setup on the Bitcoin (BTCUSD) April 6th, 2021 daily chart

There’s a bullish day, a second bullish day that gaps up, and a bearish day that opens in yesterday’s real body and closes within the first day’s real body, completing the three methods pattern.

Data-driven stock and crypto traders enter long when the price moves below and back above the pattern’s low, setting their stop loss at one ATR.

The upside gap three methods pattern is visible on Bitcoin’s (BTCUSD) April 6th, 2021 daily chart.

The pattern low is $56,466.25, occurring on the first candle. The price pushes below this low on the 7th, alerting mean reversion traders to be ready for a long entry. The bulls take control the next day, and the price moves up and to the right in a big way, leading to significant trading profits.

And while this is the best method in the stock and crypto markets, forex traders must take a different approach.

Upside Gap Three Methods Bearish Mean Reversion Trade Setup

Upside Gap Three Methods Bearish Mean Reversion Trade Setup on the Canadian Dollar (CADUSD) February 21st, 2019 daily chart
Upside Gap Three Methods Bearish Mean Reversion Trade Setup on the Canadian Dollar (CADUSD) February 21st, 2019 daily chart

Price is in an uptrend; there’s a bullish candle, a second bullish candle gapping up, and a third bullish candle closing the gap, providing us with another upside gap three methods pattern.

Professional forex traders take advantage of the upside gap three method’s downside volatility by entering short when the price moves up and back below the pattern’s high.

Let’s use the Canadian dollar (CADUSD) chart on February 21st, 2019.

The pattern high occurs on the second candle at $0.7602. The price moves above this high the day after pattern formation, signaling forex traders to be on the ready. The next day’s price was pushed back below this high, causing an entry. Data-driven forex traders took profits on the second day, capturing a nice gain.

Speaking of currency gains, what can history tell us about the best upside gap three methods trading strategies?

Does the Upside Gap Three Methods Candlestick Pattern Work? (Backtest Results)

I backtested the upside gap three methods pattern on the daily timeframe in the crypto, forex, and stock markets using the following rules:

  • A close above the 50-day SMA constitutes an uptrend.
  • I tested risk-reward ranges from 1 to 5. 
  • The optimal risk-reward ratio is selected using profit per bar.
  • Entry and exits are discussed in the how-to trade section above.
  • Confirmation must occur within three days of the pattern signal.

Similar Candlestick Patterns

Multiple candlestick patterns are often confused with the upside gap three methods.

Down Gap Three Methods vs. Upside Gap Three Methods

Downside Gap Three Methods Candlestick Pattern Illustration © Analyzing Alpha
Downside Gap Three Methods Candlestick Pattern Illustration

The downside gap three methods candlestick pattern is a three-bar bearish continuation pattern. The downside version occurs in a downtrend, has a bearish candle, followed by a bearish candle that gaps down, and then a third bullish candle that opens within the previous candle and closes within the first candle’s real body–precisely the opposite of what we saw with the upside gap.

Upside Tasuki Gap vs. Upside Gap Three Methods

Upside Tasuki Gap Candlestick Pattern Illustration © Analyzing Alpha
Upside Tasuki Gap Candlestick Pattern Illustration

The upside tasuki gap candlestick pattern is a three-bar bullish continuation pattern with two minor differences compared to the upside gap three methods. The upside tasuki gap’s first candle can be bullish or bearish, and the last candle closes within the cap instead of in the first candle’s real body.

The Bottom Line

The up gap three methods is a three-candle bullish continuation candlestick pattern. The data shows that stock and crypto traders should capture bullish volatility while forex traders should go bear.

And while this pattern can produce profits, data-driven traders should review the backtest results for the best stock market candlestick patterns.

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