Market Roller Coaster (3 Rising Valleys/Falling Peaks)

Market Roller Coaster (3 Rising Valleys/Falling Peaks)

We all know trading is exciting. That’s why many of us are so keen to learn how to ride the exhilarating ups and downs of the market while turning a smooth profit.

And much like a rollercoaster, the most excitement comes when you reach the top or bottom of an asset price.

Pejman Zwin

Content

You can see various patterns at the market’s top or bottom, such as the three rising valleys and three falling peaks – prime examples of classic reversal patterns.

In this article, I will teach you everything about how I made $20,000 in December 2022 with these two classic reversal patterns (the three rising valleys and three falling peaks patterns) and what methods you can follow to inform your own trades.

Imagine yourself strapping into a rollercoaster car, feeling yourself start to move along the rail, your heart already beating fast in anticipation. You eagerly await that upward climb and the thrilling plummet down that will follow it.

But how do you know the ups and downs on your adventure? The answer is simple: based on your knowledge about the roller coasters and your current experience, your mind predicts an upward path and a subsequent downward drop.

The same thing applies to the trading world. If you get on a rollercoaster for the first time, you might be gripped with fear not knowing where the peaks and drops will be. However, like an experienced thrill-seeker, knowing the market chart and classic patterns and analyzing the market’s history plus the current situation means you can accurately predict most market movements.

The roller coaster example perfectly describes how people feel when the price reaches the top or the bottom of an asset price. Many amateur retail traders lose huge sums of money not knowing when a top or a bottom forms, and then they panic – never a good emotion in trading.

Various patterns and indicators can be helpful for traders to find the market’s top or bottom. You can find the tops and bottoms of the market confidently by finding the three rising valleys pattern on the bottoms and the three falling peaks pattern on the tops.

the tops and bottoms

The market roller coaster has many ups and downs. To be a successful trader, you must first learn how the market behaves using patterns and indicators. Then you have to remember to master your emotions and not act based on your mood or feelings. Let’s get started with the pattern for finding the peak in a market, right before a fall.

Three Falling Peaks Pattern

Three Falling Peaks Pattern

Remember the fear and excitement you experienced when you reached the top of a roller coaster? You will feel the same when you get to the peak price of an asset.

The three falling peaks pattern usually forms high above an upward trend, signaling the trend’s final candles. Although it’s not guaranteed, in most cases, a valid three falling peaks pattern reverses the price trend downward.

Are you ready for the adrenaline rush you get when you reach the top of the roller coaster ride? Fasten your seatbelts and hold on tight. We are about to head toward the fall.

The three falling peaks pattern is a classic reversal pattern that forms the climax of our roller coaster and slowly declines the price before the bigger price drop. The three falling peaks pattern usually forms when the asset is overbought and the buyers’ interest is at an all-time low. At such high prices, bears are delighted to sell. But what does a three falling peaks pattern look like?

The falling peaks pattern consists of three peaks and two valleys of give or take equal size. The pattern has a downward slope meaning that each peak is lower than the last, and the same applies to the valleys.

The three falling peaks pattern validly forms when, after the last peak, the price falls below the second valley (shown by the purple line), signaling a market reversal and a large price drop. When you see the three falling peaks pattern on a chart, it means one thing: avoid opening a long position at all costs.

When you see this pattern on the stock market, the share is overbought, meaning you must sell and exit the market and save the money you could have lost. Entering the market at much lower prices is a smart move.

much lower prices

When it comes to the trading volume, I must say that it keeps going up with each peak and tops out with the breakout of the purple line. A breakout candle backed by low trading volume is a dangerous sign of a bear trap. As an interesting side note, the three falling peaks pattern is similar to the lead-in phase of the bump-and-run reversal bottom pattern (BARR).

Now we know why and how this pattern forms, but how can we make money with it? The answer is simple – open a short position at the right place at the right time. I’ll explain further in the coming part.

Trade on the Three Falling Peaks Pattern

Trade on the Three Falling Peaks Pattern

When the roller coaster wagon reaches the top, it slowly changes direction downward before the exciting and thrilling experience: the fall. Take a look at the picture once more. We will call the purple line in the picture the “confirmation floor.”

Before opening any positions, you must wait for a valid downward breakout of the confirmation floor. A famous saying in the trading world states that trading is 10% buying, 10% selling, and 80% waiting. However, how would one identify a valid breakout?

I’ve explained valid and fake breakouts (fakeouts) in detail in my bull/bear trap article. Since knowing the difference is essential, I will share it one more time. Otherwise, you might fall into a bear trap and suffer heavy losses. For a breakout to be valid (i.e. not a fakeout), a huge trading volume must back up the breakout candle.

The breakout candle, in this case, must either be a large bearish candle (e.g., a red Marubozu candle) or form continuation patterns like the three black crows pattern. Remember that although the three black crows pattern is widely known as a reversal pattern, it sometimes acts as a continuation candlestick pattern also.

In addition, it’s recommended to look at higher time frames. If the market trend in higher time frames is downward, the chance of a downward fakeout is slim; on the other hand, an upward fakeout is more likely to form. With the valid price breakout of that line downward, you can open your short position confidently after the valid breakout of the purple line.

You fasten your seatbelt on every roller coaster ride, and trading is no different. As Bruce Kovner said, “your stop loss is your seatbelt in the journey of trading.” Set your stop loss immediately after the entry. There are two approaches toward the stop loss; the standard approach states that you must set your stop loss on the ceiling of the resistance zone.

The second approach is to set it above the breakout candle of the confirmation floor. Some might call it the riskier approach, but I call it the stop loss with a higher risk-to-reward ratio. It’s the take-profit turn. You must measure the range between the highest peak and the confirmation floor and then subtract it from your entry price to find your take profit price.

The other approach to take profit is to take half the profit on the calculated take-profit price and take the other half when the price falls even more.

the third peak high

As with all other patterns in the financial market, The three falling peaks pattern has the tendency to fail. There are two outcomes after the third peak forms. The first possibility is the validated three falling peaks pattern, in which the price closes below the purple line, validating the pattern and causing the price to fall.

On the other hand, in the invalidated three falling peaks pattern, the price hits the purple line but rejects it, bouncing off the confirmation floor and causing the asset value to increase again. Next up, I will tell how I made $8,000 with the validated three falling peaks pattern.

Three Falling Peaks Trade Experience

My beloved dogecoin (DOGE/USDT)… Who would have thought that a short on dogecoin could make me $8,000? That’s the money the average folks make in a month, not a single day. But we are not average, are we?

That day, I watched the doge price hit a resistance zone and reject it. It went down, formed a valley, then came up again. Although the peaks’ highest prices were so close to each other, the latter was lower, so I called it a valid lower peak. Then came the last valley and finally the last peak.

I drew the confirmation floor line and waited for the price to break the line validly. A big momentum candle did the job, and I opened my short position at 0.076 USDT. I fastened my seat belt and chose the higher risk-to-reward ratio by setting my stop loss above the breakout candle at 0.0784 USDT.

I expected the asset price to drop, so I set my take-profit price at 0.073 USDT. In no time, the price tanked, hitting my take-profit and going even lower than that! The wonders of the trading world, am I right? The three falling peaks pattern made me $8,000 easy!

three falling peaks pattern

Although I made a month’s worth of 9 to 5 job salary in a few hours with the three falling peaks pattern, its counterpart, the three rising valleys, made me an additional $4,000 –a mind-blowing profit of $12,000 in a day!

Further reading

Three Rising Valleys Pattern

Three Rising Valleys Pattern

Once you have the three rising valleys pattern down, you won’t be panicking at the bottom rails of the rollercoaster. This pattern signals the bottom of a downward trend.

You can usually find the three rising valleys pattern at historically major support zones, signaling a market reversal upward. Although no pattern predicts the market with 100 percent accuracy, this pattern has a big chance of making a reversal. In the following section, I will explain the three rising valleys pattern’s psychology, formation, and trading opportunities.

Three Rising Valleys Pattern

As the name suggests, the three rising valleys pattern consists of three valleys, each higher than the last (HL). You can see two peaks between these valleys, the latter peak higher than the prior (HH).

The pattern as a whole has an upward slope. The three valleys might not line up perfectly in many cases, which is totally fine. It is also preferable if all peaks and valleys have fairly the same width and adjacent peaks and valleys have almost the same price range.

The market psychology behind this pattern posits that when the chart is in a downward trend for quite some time, it grows more and more attractive to buyers. This attractiveness is so high at major support zones that the buying pressure outweighs the sales.

You can usually find the three rising valleys pattern at these strong and historically important support zones. It is highly unlikely for the price to break these zones downward. When the price hits a major support zone, in most cases, it consolidates a bottom before reversing the price upward.

After the third and last valley, the price must go up and close above the higher peak price (shown by the purple line) to validate the pattern. With that, you can see a validated three rising valleys pattern on the chart.

As for trading volume, in a valid three rising valleys pattern, you must see a continuous surge in volume with each valley forming. The higher the volume of each valley, the stronger the pattern gets. The trading volume must peak with the purple line(higher peak price) breakout candle.

There is also the invalidated three rising valleys pattern, in which the price bounces off the purple line, invalidating the pattern. In this case, we may see another downward trend. It is also interesting to know that the three rising valleys pattern can be seen in the lead-in phase of the bump-and-run reversal top pattern.

the bump-and-run reversal

With the pattern psychology, formation, and trading volume checked, it’s time to learn the three rising valleys pattern’s trade strategy – the mastery of which added $12,000 to my portfolio.

Three Rising Valleys Pattern Trade Strategy

As our rollercoaster car hits bottom, it slowly goes higher and higher, up and down the bumps before a sharp slope upward. Be patient for the pattern to form validly. With the pattern easily noticeable, a valid breakout of the purple line upward would be our buy signal.

Check the breakout validity based on my tips mentioned in the last part. The only difference here is the upward breakout. You must look for a bullish Marubozu candle or a continuation pattern such as three white soldiers (like its counterpart, it is also a reversal pattern but occasionally acts as a continuation pattern).

As for your seatbelt, the standard way to set your stop loss for the three rising valleys pattern is to place it on the floor of the initial support zone, as you see in the picture. You also can pick a higher risk-to-reward ratio by placing your stop loss below the breakout candle.

Per usual, the take-profit price has its unique formula. You calculate the price difference between the lowest valley and the highest peak, then add it to your entry price to get your take profit price.

between the lowest valley

Let’s take a look at how identifying and trading on this pattern worked for me in practice.

Three Rising Valleys Trade Experience 

In December 2022, I noticed the three rising valleys pattern forming in the Dogecoin chart (DOGE/USDT) in the 1-hour timeframe. The price had been in a downward trend and had entered the initial support zone. After a few pumps and dumps, I finally found the two peaks and the three rising valleys pattern.

I waited for the price to go up after the last valley, and it did as I expected. A Marubozu candle closed above the last highest peak, a valid breakout of the confirmation ceiling. I had my entry signal, so I opened my long position at 0.0813 USDT. For my stop loss, I chose a higher risk-to-reward ratio by setting it below the breakout candle at 0.07840 USDT.

My take-profit formula was the one I mentioned; the price difference between the support floor and the second peak high added to my entry. I placed my take profit at 0.088 USDT. The price consolidated after the breakout, and after several more hours, it rocketed up with unbelievable momentum, filling up my wallet with $12,000 of profit.

filling up my wallet

The patterns and formulas help us all make money, but have you asked yourself: Who actually found all these patterns?

Further reading

Research by Scientists on Three Rising/Falling Valley/Peaks Pattern

Research by Scientists on Three Rising/Falling Valley/Peaks Pattern

Many traders know the legendary trader Thomas Bulkowski. Over more than 35 years of trading experience, he conducted experiments with different chart patterns and published his findings in his book, Encyclopedia of Chart Patterns.

In this book, he shared detailed formulas for the three rising valleys and three falling peaks patterns. Based on Thomas Bulkowski’s findings on the three rising valleys pattern, when the price goes up and closes above the highest peak (the confirmation ceiling), there is a 41% gain on the asset price at best.

After that initial gain, the price usually corrects itself and retraces 20%. Bulkowski (2005) also stated that after the 20% retracement, the price enters a range market. In 60% of cases, after 30 days, the price pullbacks to our initial buy signal(the confirmation ceiling). He also shared his accurate take-profit formula. The formula states that:

the 2nd peak highest price + ((the 2nd peak highest price – the 1st valley lowest price)*0.58) = Take profit price

Bulkowski was well aware of the importance of the stop loss, so he advised setting the stop loss at the third valley’s lowest price. You can find the visual form of his calculation in the picture.

take profit price

In addition to the three rising valleys pattern, he found important data about the three falling peaks pattern. Bulkowski (2005) claims that the average price dip after the breakout of the confirmation floor is 17%.

After this decline, the price retraces 20%. Bulkowski also said that in 59% of cases, the asset price returns to the breakout signal price. As he did for the three rising valleys pattern, Bulkowski came up with the following formula for the take-profit price:

The 2nd valley lowest price – ((1st peak highest price – 2nd valley lowest price)*0.33) = Take profit price

As for stop-loss price, Bulkowski marked the third peak high as his accurate stop loss.

the price falls even more

Bulkowski also found that narrower peaks and valleys perform better than wider ones. Additionally, he noticed that the taller these two patterns get, the better they perform.

Further reading
FAQs

FAQs

What kind of a pattern is the three rising valleys pattern?

The three rising valleys pattern is a reversal pattern that forms when the price hits a historically major support zone, marking the end of a downward trend. It consists of three valleys, each higher than the last, and two peaks, the latter higher than the prior. The three rising valleys pattern is valid when the price goes up after the third valley and closes above the last peak price.

What kind of pattern is the three falling peaks pattern?

The three falling peaks pattern is a reversal pattern that forms when the price hits a historically major resistance zone, marking the end of an upward trend. It consists of three peaks, each lower than the last, as well as two valleys, the latter lower than the prior. The three falling peaks pattern is valid when the price goes down after the third peak and closes below the last valley price.

Does the Three Rising Valleys/Falling Peaks pattern form a continuation pattern?

No, both are reversal patterns if they form correctly. If, after the last valley, the rising valleys pattern is invalidated by the price closing below the second peak, it might act as a continuation. As for the pattern of the falling peaks, if, after the last peak, the price closes above the last valley, the invalidated pattern might act as a continuation.

How to confirm the three rising valleys pattern validity?

To validate the three rising valleys pattern, you must look for three key clues. First is the trading volume that has to grow with each valley. It also has to peak with the second peak’s price breakout after the third valley.

The second is that the breakout candle must either be a bullish candle or form a bullish/continuation candlestick pattern. Finally, the third is to look at higher time frames to see if the overall bigger market trend is upward.

How can we confirm the three falling peaks pattern’s validity?

To validate the three falling peaks pattern, you must look for three indicators. First is that the trading volume has to grow with each peak. It also must top out with the second valley’s price breakout after the third peak.

The second is that the breakout candle must either be a bearish candle or form a bearish/continuation candlestick pattern. Finally, the third is to look at higher time frames; if the bigger market trend is downward, invalid downward breakouts are unlikely.

Conclusion

A rule in the capital market states that a trader who doesn’t pursue learning new strategies will drown in the market. In this article, we learned many invaluable lessons.

We learned that the three rising valleys pattern is a reversal pattern that usually forms at the end of a downward trend. The three falling peaks pattern, the exact inverse of the three rising valleys, mainly forms at the end of an upward trend.

We learned that the three falling peaks pattern avoids losses in stock markets, and we can even use it for short positions in two-sided markets. As for the three rising valleys pattern, we can use it in both stocks and two-sided markets (long positions).

We learned about the legendary Thomas Bulkowski’s findings and how they can aid us in identifying and utilizing these patterns. Although we learned a lot about the three rising valleys and falling peaks patterns, your education continues. To be an educated trader, I recommend learning about many other confirmations, patterns, the news effects on the market, order flow, and many others.

Then comes the practice phase. Confucius said: “Knowledge without practice is useless, and practice without knowledge is dangerous.” You must learn trading lessons to the best of your abilities and then practice to become a master trader.

Many platforms offer safe practicing grounds with fake in-game money or demo accounts to trade and practice with real market charts. To learn and hone any skill, you must practice. Otherwise, all your efforts will be in vain.

The market sometimes behaves differently from what we predict. That is why capital management is as important (if not more) as acquiring technical analysis knowledge. Trading without proper money management is like riding a roller coaster without a seatbelt.

Further reading