Three Outside Up Candlestick Pattern: How to Trade It

What is the Three Outside Up Candlestick Pattern?

The Three Outside Up is a bullish reversal candlestick pattern composed of three candles, signaling a potential shift from a downtrend to an uptrend. It is considered a reliable indicator of market sentiment turning bullish, especially when it appears after a sustained downtrend.

How to Identify the Three Outside Up Pattern?

Three successive candlesticks particularly form the three outside up patterns. Usually, this appears after a bearish trend. The movement of the candles indicates whether a trend reversal is imminent or not. Below we have mentioned the formation of the pattern.

The market has to decline for the three outside up patterns to appear.

• First Candle: A large bearish (down) candle confirming the existing downtrend.The pattern will be red.

• Second Candle: It will form a large green candle. It will be long enough so that it can contain the first candle within its true body.

• Third Candle: The third or final candle indicating three outside up has to be green again. However, this candle must close higher than the second one. This depicts that the downward trend is changing direction.

This sequence suggests that sellers are losing momentum and buyers are gaining control, often leading to a sustained upward move.

Three Outside Up vs Three Inside Up

Three Outside Up and Three Inside Up are both bullish reversal candlestick patterns, but they differ in structure and significance:

Three Outside Up

Structure: Consists of three candles

1. A bearish candle (downtrend continuation).

2. A small-bodied candle (often a doji or spinning top) that signals indecision.

3. A large bullish candle that engulfs the previous two candles.

Significance: Indicates a strong potential reversal from a downtrend to an uptrend, with the final bullish candle confirming buyer dominance.

Strength: Generally considered a more robust reversal signal due to the engulfing nature of the third candle.

Three Inside Up

Structure: Also three candles

1. A bearish candle.

2. A smaller candle (could be a doji or spinning top) that fits within the range of the first candle.

3. A bullish candle that closes above the high of the first candle.

Significance: Suggests a potential reversal, but typically considered a weaker signal compared to the Three Outside Up because it relies on a smaller inside candle and less dramatic engulfing.

Strength: Indicates initial buyer interest but may require additional confirmation.

Summary

Use Three Outside Up for more reliable bullish reversals when confirmed by volume or other indicators.

Three Inside Up can signal a reversal but may need additional confirmation due to its weaker structure.

Advantages of the Three Outside Up Candlestick Pattern

Traders prefer to use this pattern for technical analysis because of the advantages mentioned below.

Customizable infinitely

One candlestick represents any time period of an asset and so they are infinitely customizable.

Lots of information

They are quite an accurate and pure form of charting that simply displays the data in an easy-to-understand and attractive way as these candlesticks represent opens, closes, highs, and lows of a given time frame.

Easy to understand

The candlestick chart makes price data understanding very easy. You can effortlessly formulate a strategy to trade it. They are aesthetically pleasing with customizable outlines and colors available.

Indicators

Maximum indicators perfectly work with the three outside up candlestick patterns.

Market psychology and sentiment

The candlestick charts are a great option to display market sentiment over a given time frame. With various candlestick patterns like Doji patterns, traders can have access to the overall bias over a specific time horizon.

Disadvantages of Three Outside Up Candlestick

The three outside up patterns come with limitations as well, six of which have been mentioned below.

Too much information

All trading strategies are not the same. The edge for some strategies can lie in noise elimination of typical trading systems and focus on only one or two things present in the chart. Therefore, the candlesticks will clutter the charts in such trading systems.

Not always accurate

The pattern does not always give a good profit margin though found often. The pattern does not necessarily indicate that the direction of the market is confirmed. One needs to look for an overall market movement that is wider than this short-term indicator. It is always wise to pair up the indicator with others when it comes to setting stop loss orders or booking profits.

Difficult to identify

Traders will have no idea what came first, the low or the high unless they watch a bar form retrospectively in real-time. They have to go down to the lower time frames to check what happened within that candlestick. A bullish bar on a higher timeframe represents an overall trend on lower time frames and it can also represent a single parabolic move.

Gaps

Candlestick charts come with gaps. Also, there are instances when a candle closes at a certain level and the following candle can open at a different level.

Apophenia

Our brain wishes to see patterns and also look for meaning. When this is combined with technical analysis, we often see patterns in random things and try attaching things where there is nothing to the said data. Candlesticks are often known for this trip.

False confidence

Many of us are often tricked to believe in one-dimensional trading systems using only the price data. This is because the candlestick chart makes price data understanding very easy. You can effortlessly formulate a strategy to trade it.

Common Mistakes When Trading the Three Outside Up Pattern

Although the Three Outside Up pattern is a valuable trading tool, traders often make errors that can diminish its effectiveness. Here are some common pitfalls to avoid when trading the Three Outside Up pattern.

• Ignoring the Trend: The Three Outside Up works best after a downtrend. In sideways or bullish markets, it may not signal a true reversal. Consider the overall market context before trading.

• Overlooking Volume: Volume is key in confirming the Three Outside Up. Low volume suggests weak conviction; increasing volume on the second and third candles strengthens the signal.

• Not using other Indicators: Relying solely on the Three Outside Up pattern is risky. Use other indicators like RSI, MACD, or moving averages for better confirmation.

Strategies To Trade The Three Outside Up Candlestick Pattern

Pullbacks On Naked Charts

As a bullish reversal pattern, the Three Outside Up is a great pattern to watch for when the price is on an uptrend. Just wait for a pullback to start, and then spot when the Three Outside Up appears. That often signs the end of the pullback and the start of the new leg to the upside.

Trading The Three Outside Up With Support Levels

Support and resistance levels are great places to find price reversals. Since we are looking for moves to the upside, we want to trade the Three Outside Up using support levels.

How does it work:

1. Draw support levels on your charts.

2. Wait for the price to decline and reach the support level.

3. Look for a Three Outside Up pattern at that level.

4. Enter a long position when the price breaks the high of the last candle in the pattern, set your stop loss and take profit levels, and anticipate an upward move.

Trading The Three Outside Up With Moving Averages

Moving averages are great trading indicators to trade trends. The idea here is to trade pullbacks to the moving average when the price is on an uptrend.

How does it work:

• Find an uptrend, with the price jumping above a moving average

• Wait for a decline in the price to the moving average

• Check if a Three Outside Up appears at the moving average

• Go long when the price breaks the high of the last candle of the Three Outside Up

• Set your stop loss and take profit levels, and expect another leg to the upside

Trading The Three Outside Up With RSI Divergences

This is a bit different from the other trading strategies. To find a bullish RSI Divergence we want to see the price on a downtrend first, making lower lows and lower highs.

Here’s how it works:

1. Identify a downtrend and mark the lows after each downward move.

2. Compare these price lows with the RSI indicator to spot potential divergence.

3. Look for a scenario where RSI makes higher lows while price makes lower lows, indicating divergence.

4. Wait for a Three Outside Up pattern at a lower low with RSI showing a higher low, then enter long when the price breaks the pattern's high, setting your stop loss and take profit accordingly.

Trading The Three Outside Up With Fibonacci

Another way to trade the Three Outside Up pattern is using Fibonacci retracement levels, which indicate potential reversal points. The effectiveness of these levels varies with trend strength. Learn more about Fibonacci retracement levels for better timing.

Here’s how the strategy works:

• Confirm the price is in an uptrend and wait for a pullback.

• Draw Fibonacci retracement levels from the recent low to high.

• Watch for the price to hit a Fibonacci level and form a Three Outside Up pattern.

• Enter long when the price breaks the high of the pattern, then set your stop loss and take profit for an upward move.

Trading The Three Outside Up With Pivot Points

Pivot Points are automatic support and resistance levels calculated using math formulas. If you are day trading, the Daily Pivot Points are the most popular, although the Weekly and Monthly are frequently used too.

Here’s how to trade the Three Outside Up pattern with Pivot Points:

1. Enable the Pivot Points indicator on your chart and identify levels below the current price as potential support.

2. Ensure the price is in an uptrend, though it’s not mandatory.

3. Wait for the price to decline to a Pivot Point level and look for a Three Outside Up pattern forming, indicating rejection.

4. Enter long when the price breaks the pattern’s high, then set your stop loss and take profit for an upward move.

Best Indicators to Confirm the Three Outside Up

While candlesticks are powerful, confirming signals with technical indicators increases reliability:

• Moving Averages: Crossovers or price closing above moving averages reinforce bullish reversals.

• Relative Strength Index (RSI): Moving out of oversold zones signals increasing bullish momentum.

• Moving Average Convergence Divergence (MACD): Bullish crossovers support reversal signals.

• Volume Indicators: Spikes in volume suggest strong buying interest.

• Fibonacci Retracements: Price bouncing off key levels aligns with reversal signals.

Using a combination of candlestick patterns and indicators provides a robust framework for successful trading.

Conclusion

The Three Outside Up pattern is a reliable bullish reversal signal that can indicate a potential change in market direction. To increase its effectiveness, it should be confirmed with volume and other technical indicators.

Always consider the overall market trend and other supporting signals to make well-informed trading decisions.