The Three Outside Up candlestick pattern is a variation of a chart reversal pattern used to indicate a trend reversal. It forms over three consecutive trading days, typically appearing at the end of a downtrend.
The pattern consists of three candles: the first is bearish, continuing the downtrend, followed by two bullish candles signalling a shift in momentum and a potential upward trend reversal.
Key Takeaways
- The Three Outside Up is a bullish reversal pattern that appears after a downtrend.
- It consists of one bearish candle followed by two bullish candles, with the third confirming the reversal.
- The pattern highlights a shift in control from sellers to buyers, signalling buying strength.
- Best used alongside other indicators and tools to validate market direction and reduce risks.
Key Features of the Three Outside Up Candlestick Pattern
The Three Outside is defined by these elements:
- The Three Outside Up candlestick pattern typically forms during a market downtrend, where prices have been falling consistently over a period of time.
- The first candle is bearish, representing the continuation of selling pressure in the market.
- The second candle is a strong bullish candle with a large real body that completely engulfs the first candle.
- The third candle is also bullish, closing above the second candle’s close.
How the Three Outside Up Signals a Bullish Reversal?
The first candle reinforces the ongoing downtrend, closing lower than it opened and reflecting strong selling pressure with rising confidence among bears.
The second candle marks a significant shift in sentiment. It opens lower than the previous close, giving the impression that the downtrend might continue. However, buyers quickly step in with strong momentum, and the candle develops into a long bullish body that fully engulfs the first bearish candle. This engulfing action suggests that the bulls are overpowering the bears and signals an early sign of reversal.
The third candle further confirms the bullish shift. It is also bullish and closes higher than the second candle’s close. This continuation of upward movement reassures traders that the new bullish trend may be taking hold, strengthening the reversal signal provided by the earlier candles.
Three Outside Up Candlestick Pattern: Pros and Cons
| Pros | Cons |
| Flexible across timeframes – works on minutes, daily, or weekly charts. | Chart clutter – too many candlesticks may reduce clarity. |
| Clear visual signal with two strong bullish candles confirming reversal. | No guarantees – pattern alone may give false signals. |
| Highlights market psychology by showing a shift from bears to bulls. | Dependent on confirmation from volume or indicators. |
| Works well when combined with tools like RSI, MACD, or moving averages. | Hard to identify in real time, often clearer in hindsight. |
| Applicable across markets – stocks, forex, commodities, crypto. | Short term reliability only; longer trends may override signals. |
| Helps traders spot reversals early for better entry points. | Susceptible to market noise and false breakouts. |
| Tested reliability compared to single candle patterns (like doji/hammer). | Risk of over-reliance if used without broader analysis. |
Conclusion
The Three Outside Up candlestick pattern is a valuable tool for traders looking to spot potential bullish reversals at the end of a downtrend. While it offers strong insights into shifting market sentiment, it should not be relied upon in isolation. Combining this pattern with other technical indicators, volume analysis, and broader market context can help improve accuracy and reduce false signals. Ultimately, the Three Outside Up pattern works best as part of a larger trading strategy rather than a standalone signal.
FAQs
1. Is the Three Outside Up pattern reliable on its own?
Not always. While it can be a strong reversal signal, traders are advised to use it in combination with other technical indicators for confirmation.
2. On which timeframe is the Three Outside Up most effective?
It can work across multiple timeframes, but shorter timeframes often make it easier to identify and confirm in real-time trading.
3. How is it different from the Engulfing pattern?
The Three Outside Up is considered an extension of the Bullish Engulfing pattern, with the third bullish candle acting as confirmation of the trend reversal.
