Both the three inside up and down are variations of candle reversal patterns that can be seen on candlestick charts. The three inside up/down pattern requires the individual candles to create a certain sequence showcasing that the current trend no longer has its previous momentum and is probably going to start moving in a new direction. In particular, the three inside up candlestick patterns are made up of one large downward candle, another smaller upward candle that remains contained within the previous candle, and finally a third upward candle that closes above the second candle’s close.
Hence this pattern is considered a bullish reversal. It is also a short-term movement by nature so it may not always represent any change, minor or significant. Traders recommend using the three candle up/down patterns by considering the overall trendline. Here is a visual representation of three inside-up candle patterns.
Hence, as seen above, the three inside-up pattern looks bullish. This indicates that the price of the asset that has been moving low has now ended and may begin to move higher than before. Here are some of the characteristics of this type of candlestick pattern.
1. To observe a three inside up candle pattern, the market should first be moving in a downtrend.
2. The very first candle will be a down candle with a large real body. A down candle indicates the lowering price and is also known as a black candle
3. The candle after is an up candle which indicates a pause in the downward trend. The body of this up candle will be small, such that it opens and closes without crossing the real body of the first black candle.
4. Finally, the third candle will be a third up candle that is white, which will close above the second candle.
What Traders Interpret From a Three Inside Up Pattern
The downtrend appears to continue on the first candle, with a very large sell-off creating new lows. This typically makes sellers more confident while discouraging new buyers. The downtrend of the first candle creates a large sell-off while posting new lows. Within the prior candle’s trading boundary, the second candle will open.
Instead of following through with the downside, it closes higher than the current open but remains within the boundaries of the first candle. This usually raises a red flag that short-term sellers could see an opportunity to exit. Finally, the third candle completes the overall bullish reversal. It traps any remaining short sellers while also attracting new ones who wish to establish a long position.
Significance of three inside up candle pattern
– One need not trade when they see the three inside up candlestick. It can simply be used as a way of alerting sellers that the short-term price may be changing its direction.
– For any people who don’t wish to trade through this candlestick pattern, a long position can be taken by the end of the day on the third candle. It could also be taken on the following open for a bullish three inside up.
– Additionally, a stop loss can be placed right below the close of any of the three candles. Which candle is chosen to place the stop loss will depend upon the risk appetite of the trader.
– The three inside up candle pattern does not show profit targets. Hence, it’s wise to make use of another form of technical analysis to decide when to take any profits should they develop. One could use the strategy of exiting at a pre-decided reward/risk ratio as well as employ a trailing stop loss, to determine their exit.
– Important to keep in mind that the three inside-up candlesticks is fairly common. Hence, it is not always a reliable measure. As it is short-term in nature, it could bring out only a small to medium scale move in a new direction. The directional change might not always be significant with the price potentially reversing its direction again, back in the direction of the original trend.
By trading in the same direction as the longer-term trend, one may see an improvement in the performance of this pattern. Trading in the same direction as the long-term trend may help improve the performance of the pattern. During an overall uptrend try looking for the three inside up candlestick patterns during a pullback.