Broadly, the three outside up/down candlestick patterns are variations of candle reversal patterns seen on charts. They are primarily used to signal the reversal in a trend. The three outside up/down candlestick patterns is characterized by one candlestick that is either white or black, immediately followed by two candlesticks that are of the opposite color. Both these variations of the three outside patterns attempt to leverage the market’s psychology with the goal of reading near-term changes in trader sentiment. Here’s a visual representation of the three outside up pattern.
In particular, with the three outside up candlestick pattern one can observe the following characteristics:
1. For the market to show a three outside up pattern, the market has to be in a downtrend.
2. The very first candle in the pattern will be black, indicating a downtrend movement.
3. The next candle in will be a long white candle. It will be long enough such that its real body will fully contain the first black candle.
4. The third and final candle indicating three outside up will also have to be a white candle. However, this candle should have a higher close than the second candle. This indicates that the direction of the downward trend is reversing.
What Traders Interpret From a Three Outside Up Pattern
Both the three outside down and three outside up candlestick patterns occur frequently and serve as reliable indicators of a reversal in trend. Traders normally use these indicators as primary selling or buying signals. However, they use these signals in the context of other indicators meaning they wait for further confirmation before buying or selling their positions. With the three outside up candlestick patterns, one observes that the first candle continues a bearish trend.
The first candle’s close is lower than its open which indicates a short-selling interest, as it increases confidence in the bearish moves of the market. The second candle will open lower than the first, however, due to its long real body, will appear to be reversing the direction of the chart. The candle crosses through the opening tick of the first black candle displaying bull power. This action raises a red flag for any bears who may want to take their profits now and tighten their stops due to the possibility of a reversal in the market.
With the third candle, one gets a further confirmation that the market may be experiencing a reversal in its trend. This is because the security continues to show gains, with the price now being well above the boundaries of the first candle. The third candle completes the bullish candlestick that is described as ‘outside day.’ After all three candles are observed, usually the trading day may be coming to a close. Bullish confidence has increased which sets off any buying signals as the asset has closed at a new high with the third candlestick.
Significance of three outside up candle pattern
– One of the key features of this technical indicator is that its strength is determined by the size of the engulfing candlestick, which is the second one out of three. The larger the second candle the more significant is the three outside up pattern. The more the small bearish downtrend is engulfed, the more its signal weakens. Bullish sentiments seem to be overriding bearish as there is an increase in the price movement with the second candle.
– Similar to the three inside up/down patterns, the three outside up/down pattern by itself do not necessarily indicate that the market’s direction is confirmed. One has to look for an overall market movement that may be broader than this short term indicator. It is wise to pair up this indicator with others when it comes to booking profits or setting stop losses.
Some of the indicators the three outside up pattern indicators can be combined with are MACD, RSI, Volume, and Stochastic, among others. This further confirms the pattern and one can quickly pick up on the trend change as well as figure out their buy signal. For instance, if one sees a higher volume on the second and third days of the bullish reversal, this may strengthen the reliability of the three outside up candlestick patterns. Alternatively, if one witnesses a price gap the following day, the trend will probably experience a reversal.