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

The Three Outside Down candlestick pattern is a powerful bearish reversal signal in technical analysis. It appears at the end of an uptrend and indicates a shift in momentum from buyers to sellers. With a distinct three-candle structure, this pattern helps traders identify potential market reversals and refine their entry and exit strategies. In this guide, we’ll explore how the Three Outside Down pattern forms, when to trade it, and how TradeSmart’s tools can help confirm its signals for more informed decision-making.

What is the Three Outside Down candlestick pattern?

The Three Outside Down is a bearish reversal pattern that appears at the end of an uptrend. It consists of three consecutive candles and signals that bullish momentum is weakening, making way for a possible trend reversal to the downside.

When spotted in the right context, such as near resistance or during overbought conditions, this pattern can help traders anticipate a shift in sentiment. While powerful, it should always be used as part of a broader trading strategy.

Platforms like TradeSmart allow traders to overlay this pattern with confirmation indicators to validate its signals and avoid false reversals.

How is the Three Outside Down Candlestick Formed?

• First Candle (Bullish): A strong bullish candle continues the uptrend.
• Second Candle (Bearish Engulfing): A large bearish candle that engulfs the first, showing a momentum shift.
• Third Candle (Bearish Confirmation): Another bearish candle that closes below the second, confirming the reversal.

When is the Best Time to Trade Using the Three Outside Down Candlestick?

This pattern is strongest when found near resistance levels or Fibonacci retracement zones. Look for:

• RSI above 70 (overbought).
• MACD bearish crossover.
• TradeSmart’s multi-indicator support for layering confirmations.

What are the advantages of the Three Outside Down Candlestick Pattern?

• Clear Trend Reversal Signal: Indicates a momentum shift.
• Strong Bearish Confirmation: Candlestick sequence validates seller control.
• Defined Entry/Exit: Clear structure provides actionable points for traders.

What are the disadvantages of the Three Outside Down Candlestick?

• False Signals: External factors or low volume may invalidate the setup.
• Misinterpretation: Could indicate a pullback instead of a full reversal.
• Needs Confirmation: Always pair with supporting indicators like RSI or MAs.

How Accurate are the Three Outside Down Candlesticks in Technical Analysis?

• Trend Context: Best after strong uptrends. Weak trends may produce noise.
• Timeframe: More reliable on daily/weekly charts vs. intraday timeframes.
• Volume: High volume strengthens the pattern; low volume weakens it.

How to Trade with Three Outside Down Candlesticks in the Stock Market?

1. Identify Pattern: Bullish → Bearish Engulfing → Confirming Bearish candle.
2. Confirm Reversal: Use RSI, MACD, or moving averages.
3. Entry: Place sell order below the third candle’s low.
4. Stop-Loss: Set above the high of the second candle.
5. Monitor: Use trailing stops and support levels to protect profits.

What is the Opposite of a Three Outside Down Candlestick?

The opposite is the Three Outside Up pattern. Structure:

• Long bearish candle.
• Bullish candle that closes above midpoint of first.
• Another bullish candle that closes above the first candle’s high.

What are other types of Doji Candlestick Patterns besides Three Outside Down?

• Standard Doji: Small or nonexistent body. Reflects indecision.
• Long-Legged Doji: Long shadows. Shows volatility and indecision.
• Dragonfly Doji: Long lower wick. Signals bullish reversal at trend bottoms.
• Gravestone Doji: Long upper shadow. Signals bearish reversal at trend tops.
• Four-Price Doji: Rare. All four price points equal. Indicates total market balance.

Conclusion

The Three Outside Down candlestick pattern offers a reliable visual cue that a market reversal may be underway. When combined with technical indicators like RSI, MACD, volume, or Fibonacci levels, it becomes a powerful signal for identifying short-selling opportunities and managing risk. By understanding the conditions under which this pattern performs best, traders can avoid false breakouts and improve timing. Visit TradeSmart now to access real-time pattern alerts, custom indicator overlays, and all the tools you need to trade the Three Outside Down with greater precision and confidence.