Three Outside Up Pattern | Finschool By 5paisa

The three outside up candlestick pattern is a variation of the chart candle reversal pattern that is used to indicate a trend reversal. The three outside up pattern forms at the downtrend and it takes three days for the pattern to form. The three outside up candlestick pattern comprises three consecutive candles forming the patterns most preferably at the end of the downtrend.

Three Outside Up candlestick pattern

This triple candlestick pattern is an extension of the bullish reversal day pattern or the bullish engulfing pattern. This pattern is formed over three days of trading after a prolonged down string on the daily timeframe with the first two trading days looking like a bullish reversal or bullish engulfing day formation.
The third candlestick completing the pattern is a bullish candlestick that approves the potential reversal. In the above figure, we can see the schematic diagram of the three outside up patterns. We have three consecutive candlesticks here as mentioned above.
The three outside up candlestick patterns frequently occur and serve as a reliable indicator of a trend in reversal. Traders use it as a primary buying or selling signal. One can observe that the first candle continues to show a bearish trend. The close of the first candle is lower than the open. This indicates a short-selling interest because it increases confidence in the market’s bearish moves.
The second candle will be opening lower than the first. It will appear to be reversing the direction of the chart because of its long real body. It displays bull power as the candle crosses through the opening tick of the first candle. This action raises one red flag for any bears who wish to take their profits now and also tighten their stops because of the possibility of a reversal in the market.
One gets further confirmation that the market can experience a reversal in its trends, with the third candle. This happens due to the fact that the security shows gains with the price pretty well above the boundaries of the first candle. The third candle completes the bullish candlestick as described as an ‘outside day’.
The trading day comes to a close after the trader observes all three candles. There is an increase in bullish confidence that sets off any buying signals. This is because the asset closes at a new high with the third candlestick.

How Important is the Color of the Three Outside Up Candlestick?

The colors of the candles have great significance in three outside up candlestick patterns. The first candle is one short-bodied red candle.
This is so because there is in-fighting that is going on among the bulls and bears when the first candle forms. There has to be a prevailing downtrend for the trend to appear.
The second one is a large green candle signifying that the situation is now in control of the bulls. The first candle must accommodate within the body of the second green candle.
The second candle is the engulfing one. This justifies that from this point, the bulls will be taking control and defeating the bears.
This situation indicates the bullish reversal uptrend. The third candle which is also green in color indicates the upcoming bullish reversal trend. It has a tighter close than the second one. The third candle has to close higher than the second. Actually, the third candle starts a bullish reversal.

Strategies To Trade The Three Outside Up Candlestick Pattern

Strategy 1: Pullbacks On Naked Charts

As a bullish reversal pattern, the Three Outside Up is a great pattern to watch for when the price is on an uptrend. Just wait for a pullback to start, and then spot when the Three Outside Up appears. hat often signs the end of the pullback and the start of the new leg to the upside.

Strategy 2: Trading The Three Outside Up With Support Levels

Support and resistance levels are great places to find price reversals. Since we are looking for moves to the upside, we want to trade the Three Outside Up using support levels.

How does it work:

Draw support levels on your charts
Wait for the price to decline and hit the support level
Check if a Three Outside Up appears at that level
Go long when the price breaks the high of the last candle of the Three Outside Up
Set your stop loss and take profit levels, and expect a move to the upside

Strategy 3: Trading The Three Outside Up With Moving Averages

Moving averages are great trading indicators to trade trends. The idea here is to trade pullbacks to the moving average when the price is on an uptrend.

How does it work:

Find an uptrend, with the price jumping above a moving average
Wait for a decline in the price to the moving average
Check if a Three Outside Up appears at the moving average
Go long when the price breaks the high of the last candle of the Three Outside Up
Set your stop loss and take profit levels, and expect another leg to the upside

Strategy 4: Trading The Three Outside Up With RSI Divergences

This is a bit different from the other trading strategies. To find a bullish RSI Divergence we want to see the price on a downtrend first, making lower lows and lower highs.

Here’s how it works:

Find a downtrend
Mark the lows that the price makes after each leg to the downside
At the same time compare the price lows with the RSI indicator
When you see the RSI making higher lows while the price making lower lows, you found your divergence
Now you wait until a Three Outside Up appears at a price lower low, aligned with an RSI higher low.
Go long when the price breaks the high of the last candle of the Three Outside Up
Set your stop loss and take profit levels, and expect a move to the upside

Strategy 5: Trading The Three Outside Up With Fibonacci

Another popular way of trading the Three Outside Up candlestick pattern is using the Fibonacci retracement tool. Fibonacci shows retracement levels where the price will tend to revert frequently. Depending on the strength of the trend, different levels are more likely to work better with the Three Outside Up pattern. Here you can learn more about the different Fibonacci retracement levels.

Here’s how the strategy works:

You want to see the price on an uptrend
Then you wait for a decline, they always happen at some point
Pick your Fibonacci tool and draw the levels from the low to the high of the move
When the price hits a Fibonacci level and prints a Three Outside Up, that’s what you are waiting for
Go long when the price breaks the high of the last candle of the Three Outside Up
Set your stop loss and take profit levels, and expect a move to the upside

Strategy 6: Trading The Three Outside Up With Pivot Points

Pivot Points are automatic support and resistance levels calculated using math formulas. If you are day trading, the Daily Pivot Points are the most popular, although the Weekly and Monthly are frequently used too.

Here’s how to trade the Three Outside Up pattern with Pivot Points:

Activate the Pivot Points indicator on your charts
Check which Pivot Points are under the price, those will tend to work as a support
Ideally, you want to see the price on an uptrend, although is not required
Wait for a decline of the price to a Pivot Point level
At that level, you want to see a Three Outside Up pattern appearing, meaning that the level is being rejected
Go long when the price breaks the high of the last candle of the Three Outside Up
Set your stop loss and take profit levels, and expect a move to the upside

Conclusion

The Three outside Up is a three-candle pattern. To be valid, it must appear after a move to the downside. It’s a bullish reversal pattern, meaning that it signs a potential reversal to the upside. To increase the accuracy, you can trade the Three Outside Up using pullbacks, moving averages, and other trading indicators.