Falling Window Candlestick Pattern
A Falling Window candlestick pattern is a bearish continuation candlestick pattern. A Falling Window candlestick pattern is more commonly known as a gap-down. But here at Trendy Stock Charts I like to stick with the Japanese candlestick terminology when possible.
Window candlestick patterns provide extremely stiff support and resistance areas. In the case of a Falling Window candlestick pattern, a stiff resistance area is created that also provides higher probability trading opportunities on subsequent re-tests of the resistance area.
When this happens, market makers adjust instantly by driving down the stock’s share price to an area where buying and selling demand are more in balance with each other.
This sharp decrease in the stock price usually happens outside of the market’s normal trading hours, like after the release of bad press or a bad earnings announcement.
For those investors that employ shorting stocks in their toolbox, a Falling Window candlestick pattern can provide short-sellers the most confidence when entering into a short trade.
Just like the first gap-up in a new possible uptrend can offer a great opportunity to go long a stock, the first gap-down in a new possible downtrend offers that same great opportunity but to the short side. A Falling Window candlestick pattern offers a higher probability short sale trading opportunity.
Most gap-downs are news-driven events. Maybe it was earnings related. Maybe the share price was in a downtrend and then more bad news comes out for the company, like a top executive leaving. Either way, a gap-down is almost always the result of a news-driven event. Earnings events are the most common.
Requirements
Listed below are the requirements for a Falling Window candlestick pattern.
- It is a bearish continuation candlestick pattern
- A Falling Window candlestick pattern is a 2 candlestick pattern
- There must be an empty space between the two candlesticks in the pattern where the intra-day prices do not overlap
- There must be an empty space between the two candlesticks in the pattern where the intra-day prices do not overlap
- It is possible for one or both of the candlesticks to have green colored real bodies, however the most likely scenario is two candlesticks with red colored real bodies
Characteristics & Observations
Listed below are some of the characteristics and observations I have made for Falling Window candlestick patterns.[s2If !current_user_can(access_s2member_level1)]…..
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- When a Falling Window candlestick pattern is identified at the beginning of a potential new downtrend, the candlestick pattern could be considered a bearish reversal candlestick pattern as it is identifying a new downtrend
- If the first of the two candlesticks in a Falling Window candlestick pattern is a green colored real body, the pattern signifies an extremely bearish move for the stock’s share price is upcoming
- This type of bearish set-up is not as common as a regular Falling Window that has 2 candlesticks both with red real bodies
- This type of bearish set-up is not as common as a regular Falling Window that has 2 candlesticks both with red real bodies
- The first significant rebound to the resistance area created by the Falling Window candlestick typically provides an excellent trading opportunity to short the stock for a quick drop to the downside
- Shorting shares on the 1st rebound to the resistance area from a Falling Window candlestick pattern is generally a lower risk trade opportunity, but remember that shorting shares is inherently risky
Bullish Counter-Part
The bullish counterpart to the Falling Window candlestick pattern is the Rising Window candlestick pattern.
A Rising Window candlestick pattern is also known as a gap-up. The gap-up created by a Rising Window candlestick pattern creates a very significant support area below.
Overall, Rising and Falling Window candlestick patterns create very stiff support and resistance areas, respectively. These areas help to set-up higher higher probability trades than most other candlestick patterns.
The support and resistance areas created by Window candlestick patterns tend to have long-lasting effects as “boundaries” for the price.
The support and resistance areas created from Window candlesticks almost always develops on volume that is significantly higher than normal trading volume. This increased trading volume usually stays above average for a couple more trading sessions after a Window candlestick pattern.
Resistance Area
The resistance area for a Falling Window candlestick pattern is the gap-down area created between the two candlesticks. More specifically, the resistance area is between the low of the 1st candlestick pattern and the high of the second candlestick pattern.
Selling shares after the 1st rebound to the resistance area created by a Falling Window candlestick is the best opportunity to get the most profits out of the trade.
A close above the resistance area for a Falling Window candlestick pattern nullifies the candlestick’s resistance. It is also referred to as “closing the window” or closing the gap. I almost never anticipate a break above the resistance area from a Falling Window candlestick pattern to happen on the 1st attempt. The 2nd attempt is highly unlikely as well. If there is enough buying volume, the 3rd time may be the charm.
Trading Strategies
Because a Falling Window candlestick pattern creates a stiff resistance area, it helps to set-up a higher probability trade. The resistance area created from a Falling Window candlestick usually develops because of higher than normal selling volume. Because of the amount of selling volume, the gap-down doesn’t close.
I will review 2 different trading strategies for this bearish reversal candlestick pattern. The first strategy will review scaling-out of a position that you hold when the candlestick pattern develops. The second and more aggressive strategy will involve entering into a short sale position based on further anticipated declines in the share price. Now before continuing, consider the following….
Always be sure to step back and analyze the “trend of one larger degree“. This can help you determine if the pullback is going to be shorter-term in nature or if it is the start of something extremely more bearish in nature.
If You Are Currently Long the Stock
You may have noticed other sell signals flashing before the development of the Falling Window candlestick pattern. If you did and already scaled out of a few shares, congratulations. If you are long shares when a Falling Window candlestick develops, you may want to try and lock in profits on any rebound back into the resistance area. If you don’t, you may see your profits in the stock disappear at a rapid rate.
Use the very first re-test of the resistance area as an opportunity to make a scale-out sale, regardless of if the resistance area stays open or gets closed.
Most times I recommend a 1/3 scale-out purchase. For a Falling Window candlestick pattern, I recommend a 2 step scale-out process instead of a 3 step process. Therefore, make a 1/2 sale of your position to lock in gains. This is a very bearish pattern and locking in gains is crucial.
If the re-test of the resistance area fails, as it almost always does on the first re-test of the resistance area, consider scaling out of your remaining position. This could be the start to a larger correction process.
Just like how the first gap-up in a new uptrend offers a great opportunity to go long the stock, the first gap-down in a new possible downtrend offers a great opportunity to sell the stock short.
One thing to keep in mind is the scale of the chart where you see the Falling Window candlestick develop. Is it a daily chart? Is it a monthly chart? The scale of the chart will help to determine the speed in which your selling actions need to take place.
For example, if you notice a Falling Window candlestick pattern develop on a monthly candlestick chart, you may have 1-3 weeks to execute the scale-out process and try to maximize profits. But be quick because a larger drop is coming. When a Falling Window candlestick pattern develops on a daily candlestick chart, you may between 1-3 days to execute the scale-out process.
It is very important to keep everything in perspective based the scale of the chart you are analyzing. Also use other technical analysis methods for confirmation rather than relying on the candlestick pattern by itself. These other method can help to provide additional areas that can be used as scale-out areas once the downtrend is confirmed.
If You Are Looking to Short the Stock
The Falling Window candlestick pattern is the candlestick pattern that probably gives me the most confidence of a downtrend in place.
There are 2 different short-trading strategies to employ depending upon your trading style.
- Sell shares to go short the day the Falling Window candlestick is developing if you are able to; shorting shares the next day on any initial rebound is acceptable for trading as well
- Wait until the price continues its downtrend and starts to rebound and short sales on the very first re-test of the resistance area from the Falling Window candlestick pattern
A new downtrend almost always re-tests its overhead resistance area before resuming back into its new downtrend. This is either an opportunity to add to your short position or the time to make your first short sale to start building your short position.
To help ensure your short selling success rates, ensure the selling volume and selling momentum are both increasing. A MACD Histogram is a great tool to use when monitoring buying and selling momentum. Make sure there is an increase in the selling momentum after the development of the Falling Window candlestick pattern. Any slow down in selling momentum is an early indicator to start analyzing the charts and thinking about locking in short sale profits. This is simply done by purchasing shares to cover the shares sold short.
Stop-Loss on Short Sale
To try and minimize risk though, a stop-loss order should be used on all short trading strategies. For a Falling Window candlestick pattern, place the stop-loss order in 1 of 2 places:
- at the very top of the resistance area from the Falling Window candlestick pattern as described above
- place a tighter stop-loss order at the bottom of the resistance area from the Falling Window Candlestick pattern
After forming a Falling Window candlestick pattern, any meaningful downtrend should most likely continue the next couple of trading periods. Look for the selling volume to continue increasing or at least staying above average trading volume. Continued selling momentum can be monitored with the MACD Histogram chart tool.
Since prices tend to move down quicker than they move up, short selling can be a very profitable trading strategy. However, it does carry the additional risk of “unlimited losses” when compared to going long on a stock. You need to know when to lock in losses in order to be a successful short seller. If you have a hard time selling anything for a loss, don’t use short-selling as a strategy. If you are not quick to pull the trigger on a loss, that loss can start leading to exponentially larger losses.
In order to minimize risk on a short position, only enter into a short sale trade using this candlestick pattern if the selling volume was significantly above average. If so, there is not need to wait for confirmation with this candlestick pattern. The gap-down that did not close is bearish confirmation enough.
Real Chart Examples
This is a 3 month daily candlestick chart for Facebook (FB). It developed a Falling Window candlestick pattern after one of its earnings reports. Because of the cautious guidance issued during the earnings call, the amount of selling volume created the Falling Window candlestick pattern the next day when the market resumed trading.
A Falling Window Candlestick Pattern Developed on Facebook’s (FB) Daily Candlestick Chart After an Earnings Report with Cautious Guidance
As I mentioned above, almost all Window candlestick patterns develop on volume that is significantly above average trading volume. Facebook’s Falling Window candlestick was no different. It’s selling volume spike was magnified due to its cautious earnings guidance.
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