Three Inside Down – Definition, How it Works, Types, Calculation, and Trading

The Three Inside Down candlestick pattern is a powerful bearish reversal signal in technical analysis. Formed by a sequence of three candles, it reflects a shift in momentum from buyers to sellers, usually after an extended uptrend. In this article, we’ll explore how the pattern forms, when to trade it, and how to combine it with other technical indicators. Whether you’re trading stocks, forex, or crypto, TradeSmart gives you the tools to spot and act on this pattern with precision.

What is the Three Inside Down candlestick pattern?

The Three Inside Down is a classic bearish reversal pattern in candlestick charting that appears after a strong uptrend. Formed by a sequence of three candles, it signals that bullish momentum is weakening and that a shift to a downward trend may be imminent.

This pattern is especially useful for traders seeking to identify potential turning points and reposition their strategies accordingly. When recognised and confirmed, the Three Inside Down offers valuable insight into market sentiment and short-term trend reversals.

How is the Three Inside Down Candlestick Formed?

The Three Inside Down pattern is made up of three distinct candles that collectively reflect a transition from bullish dominance to bearish control:

• First Candle (Bullish): A large bullish candle marks the final stretch of the current uptrend. It represents strong buying momentum and optimism in the market.
• Second Candle (Smaller Bearish or Bullish): The next candle forms entirely within the body of the first candle. Its smaller size and position reflect indecision or a softening of bullish control. If this candle is bearish, it provides an even stronger signal of potential reversal.
• Third Candle (Bearish Confirmation): A definitive bearish candle that closes below the second candle’s low, confirming that sellers have taken control and that the trend is likely reversing.

This pattern is often seen as an extension of the bearish harami, with the third candle serving as confirmation of the downtrend. On platforms like TradeSmart, you can easily overlay candlestick recognition tools to catch this pattern in real time.

When is the Best Time to Trade using Three Inside Down Candlestick?

The most effective time to act on the Three Inside Down pattern is immediately after the third candlestick closes. This final candle acts as a confirmation signal, validating the shift in momentum from buyers to sellers.

To trade this pattern effectively:

• Watch for a large bullish candle initiating the sequence.
• Confirm that the second candle remains inside the first.
• Wait for the third candle to close below the second—this is your entry trigger.

With TradeSmart’s smart alert system, you can be notified when these patterns align, allowing you to plan your short entries more precisely.

What are the Advantages of the Three Inside Down Candlestick Pattern?

• Simple to Identify: The pattern’s structure is visually clear and easy to spot, even for beginners.
• Great for Short-Term Setups: Especially useful for short-term or intraday trading to capture brief bearish movements.
• Works Well with Other Indicators: Pairs well with RSI, moving averages, and Fibonacci levels for enhanced confirmation.

What are the Disadvantages of the Three Inside Down Candlestick?

• Risk of false signals: Without indicator confirmation, it can trigger premature entries.
• High frequency, low reliability: Appears often but not always meaningful. Needs technical support for validity.
• Short-term focus: Better for brief corrections than major reversals. Less informative for long-term strategies.

To mitigate these disadvantages, traders using TradeSmart can combine candlestick pattern recognition with smart indicators and backtesting tools to improve reliability.

What does the Green Three Inside Down Candlestick Tell?

A Green Three Inside Down pattern typically forms at the end of an uptrend and signals a possible bearish reversal.

• First Candle: A large green candlestick showing bullish strength.
• Second Candle: A smaller red or doji candle inside the first, indicating indecision.
• Third Candle: A bearish candle closing below the midpoint of the first, confirming a downside reversal.

This variation is useful for intraday setups and is strengthened by volume confirmation or overbought RSI readings. Platforms like TradeSmart help layer these confirmations visually.

How to Read Three Inside Down Candlestick in Technical Analysis?

To interpret the pattern correctly:

• Ensure the second candle’s body is completely inside the first candle’s body.
• Confirm the third candle closes below the low of the second and/or first candle.

For stronger signals:

• Validate that the pattern appears after an uptrend.
• Look for increasing volume on the third candle.
• Use indicators like RSI or moving averages for added confirmation.

TradeSmart’s automated pattern recognition and alert system helps traders identify Three Inside Down setups in real-time.

Where is the Three Inside Down Commonly Used?

• Stocks: Used to spot momentum shifts on daily/weekly charts.
• Forex: Effective for identifying short-term pullbacks.
• Cryptocurrencies: Helps navigate fast-paced reversals in assets like Bitcoin.
• Commodities: Useful for assets like gold, oil, or wheat.
• Binary Options: Helps predict near-term price drops.

Institutional and algorithmic traders often embed the Three Inside Down into automated systems. When combined with volume and RSI, it becomes a reliable tool—fully supported on TradeSmart.

What is the Opposite of Three Inside Down Candlestick?

The opposite is the Three Inside Up pattern—a bullish reversal structure formed after a downtrend. It includes:

• A large bearish candle.
• A smaller bullish candle inside the first.
• A third bullish candle that closes above the high of the first, confirming the reversal.

Which Candlestick Pattern is Similar to Three Inside Down Candlestick?

The most closely related pattern is the Three Inside Up:

• Three Inside Down: Reversal from bullish to bearish.
• Three Inside Up: Reversal from bearish to bullish.

Both patterns:

• Start with a trend-confirming candle.
• Follow with a smaller opposite-colored candle inside it.
• End with a third candle that breaks past the first candle’s range to confirm reversal.

On TradeSmart, both patterns can be detected using built-in scanning and visual confirmation tools.

Conclusion

The Three Inside Down candlestick pattern offers a clear and reliable way to identify bearish reversals, especially when combined with indicators like RSI, moving averages, or volume analysis. While not foolproof on its own, it becomes a powerful signal when used within a broader trading framework. TradeSmart’s advanced charting tools and real-time pattern recognition features make it easier to act quickly and strategically. Visit TradeSmart now and take your candlestick analysis to the next level.