Multiple candlestick patterns are highly useful tools that can help predict the price movements of an asset. When it comes to identifying trend reversals, the three inside down candlestick pattern is a reliable and powerful technical indicator. It is primarily used by traders for charting out counter trend trading strategies, and it is useful for both intraday and short-term trades. Let’s take a more indepth look at this candlestick pattern.

The three inside down candlestick pattern – an overview 

Similar to the three outside down pattern, the three inside down candlestick pattern also involves three consecutive candlesticks. It is likely to occur during a bullish trend. The pattern features a single long bullish candle, followed by two significantly smaller bearish candles. The formation of this pattern at the top of an uptrend indicates that the trend is likely to reverse, with the price of the asset seeing a fall.   

The three inside down candlestick pattern – an example

Spotting the three inside down pattern in a candlestick chart is really simple.

As you can see in this figure here, the price of the asset is trending hard in the upward direction, which clearly indicates the strong grip of the bulls in the market. Going with the trend, the first candle in the three inside down candlestick pattern closes positively. The body of the candle appears long, with the bulls dominating strongly, which is indicative of the continuation of the trend. 

The second candle in the pattern, however, opens with a ‘gap down’. This sudden and unexpected downmove in the midst of a strong uptrend completely throws the bulls off their trend and makes them nervous. Meanwhile, encouraged by the gap down opening, the bears make a strong entry and take control of the session by pushing the prices down. The session ends with the closing price of the second candle still being higher than the opening price of the first candle. The long bullish candle, followed by a short bearish candle, resembles a bearish harami candlestick pattern.  

By this point, the buying interest completely loses steam, putting the bears comfortably in charge. The selling pressure intensifies further in the third session, with the bears continuing on with the sell-off. Due to this, the third and final candle in the pattern also ends up in red. Here’s a key point that you should keep in mind. For the three inside down candlestick to be successful, it is very important for the third bearish candle to close below the second short bearish candle and the first long bullish candle. This strong down move in the third session acts as a confirmation of the bearish trend reversal.    

How to use the three inside down pattern?

Before entering into a trade based on the three inside down candlestick pattern, it is essential to know how to use the indicator effectively. Here are some points to keep in mind. 

– Firstly, look out for a hard bullish trend on the candlestick charts.

– Once the bullish trend is identified, look out for a long bullish candle. This would ultimately be the first candle in the three inside down pattern.   

– Upon spotting the long bullish candle, check whether a short bearish candle forms on the charts. The second candle should ideally be short and be contained within the first long bullish candle. The first two candles in the pattern should resemble a bearish harami. This phase of the pattern is extremely important. So, it is advisable to consider entering into a trade only if the second candle in the pattern satisfies these conditions. 

– The three inside down pattern doesn’t require you to wait for a trend confirmation. This is primarily due to the fact that the third candle in the pattern is in itself a confirmation candle.   

– Therefore, for the pattern and the bearish trend reversal to be considered successful, the third candle also needs to turn out to be bearish. In addition to this, this third bearish candle also needs to close below the second bearish candle as well as the first bullish candle. 

– Once these conditions are all satisfied, the trend reversal is said to be confirmed. At this point, you are essentially free to deploy your preferred trading strategy. 

Conclusion

The three inside down pattern can be spotted quite frequently on the charts. When dealing with this indicator, here’s a pointer that you can make use of. The position of the second bearish candle essentially signifies the strength of the trend reversal. If the second short bearish candle appears at the top of the first bullish candle, the trend reversal is likely to be slower. Conversely, if the second bearish candle appears around the mid to lower half of the first bullish candle, the trend reversal is likely to be much stronger.