Three Inside Down Complete Guide

What is Three Inside Down?

The Three Inside Down is a bearish reversal candlestick pattern consisting of three specific bars that signal the end of an uptrend and the beginning of a downward move. It is essentially a confirmed Bearish Harami. The formation begins with a long bullish candle (Day 1) that reflects the prevailing uptrend. On Day 2, a smaller bearish candle forms, with its real body completely contained within the real body of the first candle. This 'inside' bar indicates a sudden loss of momentum and indecision among buyers. The pattern is completed on Day 3 by a second bearish candle that closes below the close of the second day, providing the necessary confirmation that the bears have taken control. According to Thomas Bulkowski’s 'Encyclopedia of Candlestick Charts,' the Three Inside Down is a reliable reversal pattern, acting as a bearish reversal 65% of the time in a bull market. While it ranks 21st for overall performance, its frequency makes it a staple for technical analysts. Steve Nison highlights this pattern as a way to trade the Harami with greater certainty, as the third day acts as a filter against false signals. Volume characteristics often show a surge on the third day, reinforcing the validity of the breakout. Traders typically look for this pattern near key resistance levels or overbought conditions to maximize the probability of a successful trade.

Identification Rules

1. The market must be in an established uptrend prior to the pattern.
2. The first candle must be a long bullish (white or green) candle.
3. The second candle must be a bearish (black or red) candle with its body contained within the first candle's body.
4. The third candle must be a bearish candle that closes below 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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