Three Inside Up Complete Guide

What is Three Inside Up?

The Three Inside Up is a three-candle bullish reversal pattern that typically appears at the end of a downtrend. It is essentially a confirmed Bullish Harami. The formation begins with a long-bodied bearish candle, representing strong selling pressure. The second candle is a smaller bullish candle whose body is completely contained within the real body of the first candle. This 'inside' candle signals that the previous downward momentum is stalling. The third candle is a bullish candle that closes above the second candle's close (and ideally above its high), providing the necessary confirmation that a trend reversal is underway. From a psychological perspective, the first day shows the bears are in control. The second day's small range suggests indecision and a lack of follow-through by sellers. The third day's higher close proves that buyers have regained control. According to Thomas Bulkowski’s 'Encyclopedia of Candlestick Charts,' this pattern has a high theoretical reversal rate, often cited around 65% in bull markets. While volume is not a strict requirement for the pattern's definition, an increase in volume on the third day significantly enhances the reliability of the signal. Steve Nison, who introduced Japanese candlesticks to the West, emphasizes that the Harami (the first two bars) requires confirmation, which the third bar of the Three Inside Up provides. Traders often look for this pattern near established support levels to increase the probability of a successful trade.

Identification Rules

1. The market must be in a defined downtrend prior to the pattern formation.
2. The first candle must be a long bearish (black or red) candle.
3. The second candle must be a bullish candle with a real body contained within the first candle's body.
4. The third candle must be a bullish candle that closes above the close of the second candle.

References

• Thomas N. Bulkowski (2005). Encyclopedia of Chart Patterns.
• Steve Nison (2001). Japanese Candlestick Charting Techniques.

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