Three Outside Up – Definition, How it Works, Types, Calculation, and Trading
The Three Outside Up candlestick pattern is a widely recognised bullish reversal signal that helps traders spot potential shifts in market direction after a downtrend. Consisting of three distinct candles, this pattern marks the transition from bearish to bullish sentiment and often acts as a key entry point for long positions.
In this article, we’ll explore how the Three Outside Up forms, when it’s most effective, and how you can combine it with indicators on TradeSmart to build a more reliable trading strategy.
What is the Three Outside Up candlestick pattern?
The Three Outside Up is a classic bullish reversal pattern found in candlestick charting. It typically forms after a downtrend, signalling that selling pressure is weakening and buyers may soon take control.
The pattern consists of three consecutive candles:
- A small bearish candle,
- A large bullish candle that completely engulfs the first,
- A second bullish candle that closes higher, confirming the reversal.
How is the Three Outside Up Candlestick Formed?
- First Candle (Bearish): A small red candle continues the downtrend, showing seller control.
- Second Candle (Bullish Engulfing): A large green candle engulfs the first, indicating a strong shift in sentiment.
- Third Candle (Bullish Confirmation): A bullish candle closes higher than the second, confirming the reversal.
When is the best time to Trade using the Three Outside Up Candlestick?
Look for this pattern:
- Near support zones or consolidation areas.
- After news-driven sell-offs or volatility spikes.
- Ideal entry is after the third candle closes with confirmation from RSI or MACD.
What are the advantages of the Three Outside Up Candlestick Pattern?
- Early Reversal Detection: Identifies buyer strength returning after downtrends.
- Frequent Occurrence: Common in volatile/trending markets.
- Clear Entry/Exit Points: Easy to define strategy structure.
What are the disadvantages of the Three Outside Up Candlestick?
- Flat Market Limitation: May fail without momentum.
- Needs Confirmation: Best when paired with RSI, MACD, or volume.
How to read the Three Outside Up Candlestick in Technical Analysis?
The pattern includes:
- First Candle: Bearish, signals trend continuation.
- Second Candle: Bullish engulfing, indicates reversal potential.
- Third Candle: Bullish close above the second, confirming reversal.
Read candlestick bodies and wicks to understand sentiment and volatility.
How to Trade with Three Outside Up in the Stock Market?
- Entry: Just above the high of the third candle.
- Stop-loss: Below the low of the third candle.
- Target: Use resistance zones or set a risk-reward ratio.
Some may short if price breaks below the fourth candle’s low.
What is the Opposite of a Three Outside Up Candlestick?
The opposite is the Three Outside Down pattern:
- Strong bullish candle,
- Bearish engulfing candle,
- Second bearish candle confirming trend reversal.
What are other types of Doji Candlestick Patterns besides Three Outside Up?
- Standard Doji: Open and close are equal, showing indecision.
- Dragonfly Doji: Long lower wick, suggests bullish reversal after downtrends.
- Long-Legged Doji: Volatile indecision, appears before breakouts.
Conclusion
The Three Outside Up candlestick pattern is a practical and frequently occurring signal that offers clear insights into bullish trend reversals. When used in combination with tools like RSI, MACD, or volume analysis, it becomes a valuable part of a trader’s toolkit. Visit TradeSmart now to unlock advanced pattern recognition, real-time alerts, and everything you need to trade smarter.
