Three Outside Up and Three Outside Down
Three Outside Up Pattern
The Three Outside Up is a strong 3 candle reversal pattern occuring during a downtrend and is the confirmation signal of a Bullish Engulfing Pattern and the opposite signal of a Three Outside Down Pattern.
The first two candles are a Bullish Engulfing Pattern, a two day pattern that has a small body day completely contained within vertical range of the second day's larger candle's body. This formation suggest that the previous trend is coming to an end.
The Bullish Engulfing Pattern is confirmed by a third white candlestick, with a higher close than the second day. This is the Three Outside Up signal.
Rules:
- The downward trend has been fairly consistent for a good period of time.
- The first candlestick is in the direction of the trend (a black candlestick).
- The second candlestick is white and engulfs the previous day's body.
- The third candlestick is white and closes higher than the second day.
Signal Strengtheners:
- The longer and/or more dramatic the downtrend, the stronger chance of a reversal.
- The higher the close of the second candlestick, the stronger chance of a reversal.
- The higher the third day closes, the stronger the chance of a continued reversal.
General Analysis:
The market trend was on its way down. The price opens lower than where it closed the previous day. But the Bulls start coming out in force buying at the low prices in an undervalued market, increasing the price. By the end of the day, the bulls have moved the price above where it opened the day before. Suddenly investor sentiment sees the trend has been changed. The Bullish Engulfing Pattern represents the reversal of the downward trend investor sentiment.
The following day, the Bears have closed their positions and the Bulls have taken control, as shown by the continued rise in price and the formation of the Three Outside Up pattern.
Three Outside Down Pattern
The Three Inside Down is a strong 3 candle reversal pattern occuring during an uptrend and is the confirmation signal of a Bearish Engulfing Pattern and the opposite signal of a Three Inside Up Pattern.
The first two candles are a Bearish Engulfing Pattern, a two day pattern that has a small body day completely contained within vertical range of the second day's larger candle's body. This formation suggest that the previous trend is coming to an end.
The Bearish Engulfing Pattern is confirmed by a third black candlestick, with a lower close than the second day. This is the Three Outside Down signal.
Rules:
- The upward trend has been fairly consistent for a good period of time.
- The first candlestick is in the direction of the trend (a white candlestick).
- The second candlestick is black and engulfs the previous day's body.
- The third candlestick is black and closes lower than the second day.
Signal Strengtheners:
- The longer and/or more dramatic the uptrend, the stronger chance of a reversal.
- The lower the close of the second candlestick, the stronger chance of a reversal.
- The lower the third day closes, the stronger the chance of a continued reversal.
General Analysis:
The market trend was on its way up. The price opens higher than where it closed the previous day. But the Bears start shorting at the high prices as the Bulls start losing momentum. By the end of the day, the Bears have come out in force and moved the price below where it opened the day before. Suddenly investor sentiment sees the trend has been changed. The Bearish Engulfing Pattern represents the reversal of the upward trend.
The following day, the Bulls start closing positions as the Bears continue to go short, showing strength of reversal as the Bulls lose control to the Bears. By the end of the third day, the Bears have taken control as can be seen by the formation of the Three Outside Down pattern.
