San-Ku is a candlestick pattern that comprises of three separate gaps within a specific trend. When the third gap appears, the formation of the pattern is an indication of a potential reversal against the prevailing trend.
How to Use San-Ku (Three Gaps) Patterns in Binary Options Trading
Here you will learn how to interpret the San-Ku or three-gap pattern and how to apply it in your binary options trading strategy.
How to interpret the San-Ku Pattern
As mentioned above, this pattern appears when three distinct gaps appear within a particular trend. The third gap indicates a potential reversal due to an exhaustion of the current trend.
However, just because three gaps form in a trend does not mean you should use this as a good sign to trade. The pattern must be confirmed and it must meet certain criteria.
First, gaps only form in candlestick charts and not in line charts. A gap forms because of a major external event such as a huge slump in oil production, which could cause prices to change.
Generally, individual gaps are divided into four categories. In a San-Ku pattern, only two of these gaps appear commonly and they could be a helpful confirmation of the pattern. These gaps include breakaway gaps, common gaps, exhaustion gaps, and runaway gaps or measuring gaps.
The breakaway gap forms outside of a specific trend while common gaps tend to be temporary and occur when an asset is trading in a range (not a trend). These two types of gaps should not be used to identify and confirm a San-Ku pattern.
The other two gaps—the runaway gap and the exhaustion gap are the most important when confirming a San-Ku pattern. The runaway gaps signal a continuation of a trend and their formation takes place within a distinct trend. The first two gaps in a San-Ku pattern are typically runway gaps. The exhaustion typically occurs at the end of a trend and it is a confirmation of a reversal in the trend.
When this last gap forms and starts to become darker, traders usually expect a reversal and they are keen on exiting the trade.
Sometimes, you will see that the three gaps have spaces in between them but this does not matter. What’s more important is that the three gaps form within the same distinct trend.
Build a profitable strategy with San-Ku pattern
When the San-Ku pattern forms, it is an indication that the price level of an asset has been really overstretched and exhausted and as such, a reversal in the market trends is expected, starting from the close price of the third and last candlestick.
You can enter a trade immediately the price of an asset reverses and fills any of the three gaps. In other words, you would be entering a trade with the aim of profiting from a sustained reversal of the price movement in the opposite direction.
So, when is it suitable to profitably initiate a buy trade?
a. When three gaps form at the opening of the trade and close below the open price.
b. Price of an asset reverses upward to fill the gap between the close of the second candlestick and the opening of the last candlestick.
c. Initiate a stop-loss below the lower level of the last candlestick.
d. When all three gaps are filled, you stand to make a profit. You can now adjust the stop-loss to the remaining half of the position to the lower level of the second candlestick.
Finally, to really profit from the San-Ku pattern, you would have to apply other technical indicators as well, in order to confirm the reversal pattern.