Three Outside Down Candlestick Pattern: Candlestick patterns are a fundamental tool in technical analysis, used by traders to predict future price movements based on historical data. Among the various candlestick patterns present, the “Three Outside Down” is a significant pattern that indicates potential bearish reversals in security. 

In this article, we shall look into the specifics of the Three Outside Down candlestick pattern, its identification, meaning, and trading strategy with an example.

Three Outside Down Candlestick Pattern – Definition

The Three Outside Down candlestick pattern is a bearish reversal pattern that forms at the end of an uptrend. The pattern signals a potential shift in trend direction from bullish to bearish providing a clear signal for traders to consider exiting long positions or entering short positions.

The pattern consists of three specific candlesticks: a green(bullish) candle followed by two consecutive red(bearish) candles, which we shall discuss further in detail.

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Three Outside Down Candlestick Pattern

Three outside Down Candlestick pattern – Identification

As the Three Outside 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 green candle which is part of the previous uptrend.
  2. Second candle: A large red candle that engulfs the prior green candle. 
  3. Third candle: A red candle that closes below the second red candle.

Three Outside Down Candlestick Pattern – Meaning

The Three Outside 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 bulls are still in control and pushing the price up. However, the formation of the next red candle in the pattern suggests that bears are gaining strength and pushing the price down showing that they are overpowering the bulls.

Finally, with the formation of a third red candle closing lower than the first candle, one can confirm that the sellers have taken control 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 Outside Down Candlestick Pattern – Trading Ideas

In a strong prevailing uptrend, the formation of the three outside 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

Three Outside Down Candlestick Pattern - Example

Entry:-  Enter a short position in security below the closing price of the third candle of the pattern formed.

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 reward.

Profit Target:- The profit targets can be set to the immediate level of support from the entry of the position or based on one’s risk-reward evaluation.

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

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Three Outside Down Candlestick Pattern – Example

In the above chart of Bharat Electronics Ltd., we can observe the formation of the Three Outside 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. 213.55 and the stop loss was at Rs. 216.40

Three Outside Down Candlestick Pattern – Limitations

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

  • The pattern’s effectiveness may vary depending on market conditions; it can be more reliable in market trends than in range-bound markets.
  • The pattern requires three consecutive sessions (or candles) to form, which may result in a delayed entry.

Conclusion

The Three Outside Down candlestick pattern is a powerful tool for traders seeking to identify potential bearish reversals. By understanding its formation and implications, traders can make more informed decisions about their positions and better manage their risk. 

As with any technical analysis tool, it’s essential to use this pattern in conjunction with other indicators and analysis methods to confirm signals and enhance trading strategies.

Written by Deepak

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