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The three falling peaks chart pattern is a price pattern that appears often, not only
in the stock market but other markets as well. It is a reliable performer that shines in a
bear market. The chart pattern sports three peaks, each
successive one below the last. When price closes below the lowest valley between the three
peaks, it confirms the three falling peaks chart pattern as a valid one. For more
information, see pages 684 to
697 of the book
Encyclopedia of Chart Patterns, Second Edition, and the following...
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The Three Falling Peaks Chart Pattern
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Important Bull Market Results
Overall performance rank (1 is best): 8 out of 21
Break even failure rate: 12%
Average decline: 17%
Pullback rate: 59%
Percentage meeting price target: 33%
Identification Guidelines
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Characteristic |
Discussion |
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Price trend |
Upward leading to the pattern
then price trends downward. |
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Shape |
Three peaks, each one lower
than the last. |
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Symmetry |
Each peak should look similar
to the others. If you select wide, thick peaks, they should all look that way. The peaks DON’T have to fall along a
trendline. |
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Confirmation |
The pattern confirms as valid
when price closes below the lowest valley in the pattern. |
Trading Tips
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Trading Tactic |
Explanation |
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Measure rule |
Reference the Measure Rule figure to the right. Compute
the height from highest peak (1) to lowest valley
(2) then multiply it by the above
“percentage meeting price target.” Subtract the result from
the lowest valley (2) in the pattern to get a price
target (3). The link highlighted on the left discusses
the measure rule in depth. |
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Valley short |
Reference the Valley Short figure to the right. For
aggressive traders:
If the first valley (point A, between peaks 1 and 2)
is below the second (point
B between peaks 2 and 3), use the second valley
(B) as the confirmation price,
not the lowest valley (A). |
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Stop |
Place a stop slightly above the most recent minor high
(point 3) in the three falling peaks chart pattern. If you are unfamiliar with
stop placement, click the link to the left. |
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Cover |
If price rises above any of
the peaks, then cover the short. |
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Volume shape |
Patterns with U-shaped volume perform best. Click the link
to the left for information on volume shapes, and click here for performance information. |
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Breakout volume |
Patterns with light breakout volume
tend to perform well. The link to the left lists chart patterns by light breakout
day volume. |
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Pullbacks |
Pullbacks hurt performance. The link to the left provides
more information about pullbacks and this
link provides performance. |
Example
The above figure shows an example of the three falling peaks chart pattern. Peaks 1, 2, and 3 mark the outline of
the chart pattern. Point 4 is the confirmation price, the price at which squiggles on the stock chart become a three falling
peaks chart pattern.
Taking the height from peak 1 (the highest high in the three falling peaks chart pattern) and valley 4 (the lowest
low between the three peaks), multiplying it by 33% (the percentage meeting price target from Important Bull Market
Results table near the top of this page) gives a target of about 79. When the stock opened after the company issued an
earnings warning, price gapped lower and reached the target the same day. Basing a new target on the full height (point 1 minus point 4, subtracted
from point 4) gives a target of about 69. The stock reached that target within the month.
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 Measure Rule
 Valley Short
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