Three Inside Down Candlestick Pattern: In the world of technical analysis, candlestick patterns play a pivotal role in helping traders predict future price movements of securities. One such significant multiple candlestick pattern is the “Three Inside Down” candlestick pattern. 

In this article, we will delve into the Three Inside Down candlestick pattern, exploring its formation, psychology, and trading strategy with an example.

Three Inside Down Candlestick Pattern – Definition

The Three Inside Down candlestick pattern is a bearish reversal pattern that typically appears at the end of an uptrend. It signals a potential shift in market sentiment from bullish to bearish, indicating that the price of security may start to decline.

The pattern consists of three specific candlesticks: a large green candle followed by two consecutive red candles.

Note: If you want to learn Candlesticks and Chart Trading from Scratch, here’s the best book available on Amazon! Get the book now!

telegram channel
Three Inside Down Candlestick Pattern

Three Inside Down Candlestick Pattern – Identification

As the Three Inside Down Candlestick pattern suggests a bearish reversal, it is preferable for this pattern to appear in an uptrend. Now, let us understand the formation of each candle in this pattern:

  1. First Candle: A large green candle should be part of the previous uptrend.
  2. Second candle: A small red candle that forms within the body of the first green candle.
  3. Third candle: Another red candle that opens within the first candle and closes below it.

Three Inside Down Candlestick Pattern – Meaning

The Three Inside Down pattern formation indicates a potential shift in market sentiment, from bullish to bearish. Here, the formation of the green candle in the pattern indicates that the buyers are in control of the security. However, the formation of the next red candle in the pattern suggests that the sellers have entered and may overthrow the buyers in the security.

Finally, with the formation of a third red candle closing lower than the first candle, one can confirm that the buyers have been overtaken by the sellers in this pattern.

As a result, this pattern serves as a warning sign for the conclusion of a bullish trend and the emergence of a bearish trend.

Three Inside Down Candlestick Pattern – Trading Ideas

In a strong prevailing uptrend, the formation of the three inside down pattern indicates the end of a bullish trend and the start of a potential bearish reversal. Let us now understand the steps to trade this pattern

  1. Entry:-  Enter a short position in security below the closing price of the third candle of the pattern formed.
  2. Stop loss:- The stop loss is simple for the pattern, the high price of the pattern formed can be set as a stop loss for the good risk-to-reward.
  3. Profit Target:- The profit target can be based on the risk-to-reward ratio. Also, the profit targets can be set to the next level of support from the entry of the position.

Furthermore, one can use this pattern one can also use the three inside down candlestick pattern as a means to exit a long position as the pattern suggests the end of an uptrend.

Three Inside Down Candlestick Pattern – Example

In the above chart of Reliance Industries, we can observe the formation of the Three Inside Down candlestick pattern at the end of an uptrend. As discussed in this article, the price saw a change in trend from bullish to bearish after the formation of the pattern.

At the time of the formation of this pattern, a trader could have taken a short position when the price of the stock started trading below Rs. 2847.25 and the stop loss was at Rs. 2865.90.

Three Inside Down Candlestick Pattern – Limitations

While the Three Inside Down indicates a powerful reversal signal, it is not always accurate, and traders should be aware of its limitations:

  • The effectiveness of the pattern may vary depending on market conditions, it can be more reliable in trending markets than in range-bound markets.
  • The pattern takes three consecutive sessions (or candles). As a result, the market may already account for all the price action.

Conclusion

The Three Inside Down pattern is a strong tool for traders to identify potential bearish reversals in the security. Understanding its formation, meaning, strategies and limitations, helps traders to make informed trading decisions.

As a trader, it is always preferred to use the pattern in conjunction with other technical tools to avoid false signals. Proper risk management with good risk-reward ratios and backtesting make a trader profitable in the long run.

Written by Deepak

By utilizing the stock screenerstock heatmapportfolio backtesting, and stock compare tool on the Trade Brains portal, investors gain access to comprehensive tools that enable them to identify the best stocks, also get updated with stock market news, and make well-informed investments.


Start Your Stock Market Journey Today!

Want to learn Stock Market trading and Investing? Make sure to check out exclusive Stock Market courses by FinGrad, the learning initiative by Trade Brains. You can enroll in FREE courses and webinars available on FinGrad today and get ahead in your trading career. Join now!!