Three Outside Up Complete Guide

What is Three Outside Up?

The Three Outside Up is a powerful three-candle bullish reversal pattern that typically appears at the end of a downtrend. It is essentially a confirmed Bullish Engulfing pattern, where the third candle provides the necessary validation for traders to enter a long position. The formation begins with a small bearish candle, reflecting the final stages of selling pressure. The second day sees a significant shift in sentiment; a large bullish candle opens lower but rallies to close above the first day's open, completely engulfing its body. The third day completes the pattern with another bullish candle that closes higher than the second day’s close, signaling that the bulls have regained control. According to Thomas Bulkowski’s 'Encyclopedia of Candlestick Charts,' the Three Outside Up is one of the most reliable candlestick patterns, boasting a theoretical reversal rate of approximately 75% in bull markets. It ranks 10th out of 103 patterns for overall performance. Steve Nison, who introduced Japanese candlesticks to the West, emphasizes that the engulfing nature of the second bar represents a 'takeover' by buyers. Volume typically expands on the second and third days, providing further evidence of institutional accumulation. While highly reliable, technical analysts often look for this pattern near established support levels or in conjunction with oversold RSI readings to maximize its predictive power. The pattern's strength lies in its built-in confirmation, reducing the risk of 'fakeouts' often associated with two-day patterns.

Identification Rules

1. The market must be in a defined downtrend prior to the pattern formation.
2. The first candle is a small bearish (black or red) candle.
3. The second candle is a large bullish (white or green) candle that completely engulfs the body of the first candle.
4. The third candle is 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.

More Analysis