- February 21, 2025
- Posted by: Shane Daly
- Category: Trading Article
The Three Outside Up pattern can be a fairly reliable reversal signals, appearing when a downtrend might be losing steam. This three-candle formation tells a story: sellers begin to lose their grip as buyers step in with increasing confidence.
While many traders recognize this pattern, understanding its nuances and proper execution can mean the difference between profitable trades and trading losses.
TLDR
- A three outside up pattern consists of three candles: a bearish candle followed by two bullish candles that signal trend reversal.
- The second candle must completely engulf the first candle’s body, showing strong buyer control over previous selling pressure.
- Trading volume should increase during the second and third candles to confirm genuine buyer participation in the reversal.
- Entry points are best executed after the third candle closes, with stop-losses placed below the pattern’s lowest point.
- The pattern is most reliable when appearing at the end of a downtrend and near established support levels.
What is the Three Outside Up Pattern?
The Three Outside Up pattern is a powerful signal that helps traders spot when a downward price trend might be coming to an end.
This pattern consists of three specific candles that work together to show a potential change in market direction.
The three outside up pattern starts with a bearish (downward) candle, showing sellers are still in control.
Next comes a larger bullish candle that completely covers the first candle’s body (engulfing candle), indicating buyers are taking charge.
The final candle moves even higher, confirming the reversal. This third candle is important as it provides extra confirmation that the trend is changing.
The third candle’s upward movement serves as the final confirmation, strengthening confidence that a true market reversal is underway.
Traders value this pattern because it offers clear confirmation through its three-step structure, making it more reliable than simpler patterns for spotting market reversals.
Like doji candlestick patterns, this formation should be analyzed alongside overall market structure and other technical indicators for the most reliable trading signals.
How to Identify and Trade the Pattern
Successful trading of the 3 Outside Up pattern requires clear confirmation signals and a well-planned entry strategy.
Traders should wait for the completion of all three candlesticks before entering a position, as premature entries can lead to losses when the pattern fails to fully form.
Smart risk management includes setting stop-losses below the pattern’s low point and determining profit targets based on nearby resistance levels or specific risk-reward ratios.
Similar to Tweezer pattern trading, using a structured checklist approach can help verify pattern formation and improve trading accuracy.
Confirmation and Entry Strategies
Mastering the Three Outside Up pattern requires attention to confirmation signals and precise entry strategies. Traders should validate the pattern through several key indicators to ensure reliable trading opportunities. The three outside up confirmation includes checking the third candle’s close above the second candle’s high and monitoring trading volume for increased buyer participation.
Entry strategies focus on two main approaches. Traders can either enter immediately after the third candle closes, confirming the pattern’s completion, or wait for a pullback to test the breakout level.
Stop-loss orders should be placed below the pattern’s low, while profit targets can be set using resistance levels or predetermined risk-reward ratios. This systematic approach helps traders maximize the pattern’s potential while managing risk effectively.
Risk Management Tips
Smart risk management forms the basis of successfully trading the Three Outside Up pattern (or any trading strategy). Traders should always implement a stop-loss order to protect their capital, typically placing it below the low of either the first or second candle of the pattern. This helps limit potential losses if the trade moves against expectations.
Setting an appropriate risk-to-reward ratio is equally important, with most traders aiming for at least 1:2 or 1:3. This means targeting profits that are two to three times greater than the potential loss.
Additionally, traders should limit their position size to 1-2% of their total trading capital per trade. Waiting for pattern confirmation and analyzing market context, such as trend direction and support levels, further enhances the probability of successful trades.
Why the Three Outside Up Pattern Works
When traders seek reliable reversal patterns in technical analysis, the Three Outside Up pattern shows a clear shift in market sentiment from bearish to bullish.
Understanding three outside up involves recognizing its three-candle structure, which provides strong confirmation of a potential trend reversal.
The pattern works because it shows a complete story of market psychology. It begins with a bearish candle representing selling pressure and bearish traders are enjoying the run. the bullish engulfing candle steps in and that shows buyers taking control. The third bullish candle confirms this shift in momentum. Hardcore shorts have to exit their trades – fueling the up move – and new buyers step in after seeing sellers wiped out.
The three outside up reversal pattern is effective because it combines the power of the bullish engulfing pattern with additional confirmation, reducing the likelihood of failing trades.
This pattern helps identify trapped traders who entered short positions during the initial bearish candle and are now forced to exit as the market moves against them.
Avoiding False Signals and Overtrading
Success in trading the Three Outside Up pattern requires traders to distinguish between genuine reversal signals and false ones.
I have to emphasizes the importance of confirming signals through multiple factors. When developing a three outside up trading strategy, should focus on volume confirmation, trend context, and support level analysis.
Key verification steps include checking for increased trading volume during the second and third candles, ensuring the pattern forms after a clear downtrend, and confirming its appearance near established support levels.
Technical indicators like RSI and MACD can provide additional validation. Traders should also wait for the third candle to completely close before entering positions and always implement proper risk management through stop-loss orders and position sizing.
Acknowledging that trading uncertainty is normal helps traders maintain emotional balance when analyzing potential setups and prevents overtrading based on fear or doubt.
Your Questions Answered
What Is the Historical Success Rate of the Three Outside up Pattern?
Historical success rates for the three outside up pattern typically range between 60-65% in predicting bullish reversals, though effectiveness varies across different market conditions and timeframes studied.
Can the Three Outside up Pattern Be Effective in Cryptocurrency Markets?
The pattern can be effective in cryptocurrency markets due to their high volatility and trading volume, though traders should combine it with other technical indicators for better confirmation.
How Does This Pattern Compare to Other Bullish Reversal Patterns?
Bullish reversal patterns vary in reliability, with Three Outside Up showing higher accuracy compared to single candlestick patterns but similar effectiveness to other three-day formations like Morning Star patterns.
What’s the Average Time Frame for the Pattern to Complete Its Formation?
The pattern completes its formation over three consecutive trading days, with each candle representing one day of price action in the market sequence.
Are There Specific Market Conditions Where This Pattern Tends to Fail?
Market conditions that typically lead to pattern failure include high volatility, strong downward momentum, oversold conditions, or when trading occurs near major resistance levels or during economic uncertainty.
Summary
The Three Outside Up pattern offers traders a reliable tool for identifying potential trend reversals in downward markets. When properly identified and confirmed with volume analysis, this three-candle formation can signal profitable trading opportunities. However, success requires patience, strict adherence to risk management principles, and careful attention to market context. Like all trading patterns, it works best when combined with other technical indicators and sound trading strategies.
