Three inside candlestick pattern

Jan 11, 2020 | Pattern

What are the Three Inside Up/Down?

Three inside up and three inside down are reversal patterns with three candles that appear on candlestick charts. The pattern requires three candles in a certain sequence, showing that the current trend has lost momentum and that movement can begin in the other direction.

Key takeaways

  • The “three up” model is a bullish reversal, consisting of a large downward candle, a smaller ascending candle contained in the previous candle, and then another ascending candle, which closes above the close of the second candle.
  • The “three down” model is a bearish reversal, consisting of a large upward candle, a smaller downward candle contained in the previous candle, and then another downward candle, which closes below the close of the second candle.
  • The model is short-term in nature and may not always lead to a significant or even insignificant change in the trend.
  • Consider using a template in the context of a general trend. For example, use three up during a pullback in a general uptrend.

Understanding the Three Inside candles up/down

The upper version of the pattern is bullish, which indicates that the downward movement of the price may end, and the upward movement begins. Here are the characteristics of the template.

  1. The market is in a downtrend or is declining.
  2. The first candle is a black (descending) candle with a large real body.
  3. The second candle is a white (up) candle with a small real body that opens and closes in the real body of the first candle.
  4. The third candle is a white (up) candle, which closes above the close of the second candle.

The lower version is bearish. This shows that the higher price movement ends and the price begins to move lower. Here are the characteristics of the template.

  1. The market is in an uptrend or upward movement.
  2. The first candle is a white candle with a big real body.
  3. The second candle is a black candle with a small real body that opens and closes in the real body of the first candle.
  4. The third candle is a black candle that closes below the close of the second candle.

The three internal patterns are essentially harami patterns, followed by the final confirmation candle, which many traders still expect with harami.

Three Inside Up Trader Psychology

The downtrend continues on the first candle with a big sale opening new lows. This discourages buyers, and sellers are growing confidently. The second candlestick opens in the trading range of the previous candlestick. Instead of going down, it closes higher than the previous close and current open. This price action raises a red flag that some short-term sellers may use to exit. The third candle completes the bullish reversal, holding the remaining short sellers and attracting those who are interested in opening a long position.

Three Inside Down Trader Psychology

An uptrend continues on the first candle, with a large rally opening new highs. The second candlestick opens within the trading range of the previous candlestick and closes below the previous close and current open. This is worrying for buyers who may begin to sell their long positions. The third candle completes the bearish reversal when longer positions are forced to take into account sales, and short sellers can connect to take advantage of the falling price.

Trading the Three Inside Up/Down Candlestick Pattern

Sample should not be sold. It can simply be used as a warning that the short-term price direction may change.

For those who want to trade, a long position can be opened closer to the end of the day on the third candle or at the next opening for the bull three up. Stop loss can be placed below the minimum of the third, second or first candle. It depends on what risk the trader is ready to take.

For the bearish three inside down, the trader can enter a short position closer to the end of the day on the third candle or at the opening of the next day. Stop loss can be placed above the third, second or first maximum of the candle.

These models do not have profit objectives. Therefore, it is best to use a different method to decide when to take profits if they develop. This may include the use of a trailing stop, an exit with a predetermined risk / reward ratio, or the use of technical indicators or other candlestick patterns to signal an exit.

The pattern is quite common, and therefore not always reliable. This model is also short-term, therefore, although it can sometimes lead to significant changes in the trend, it can only lead to small or medium movement in a new direction. Following the model, the price may not follow the expected direction at all, but instead may again change course in the direction of the initial trend.

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