Three Outside Up Candlestick Pattern: In the world of technical analysis, candlestick patterns serve as invaluable tools for traders, offering insights into market sentiment and potential price movements. Among the myriad of patterns, the Three Outside Up stands out for its reliability and significance.

In this article, we delve into the intricacies of the Three Outside Up candlestick pattern, exploring its formation, interpretation, and strategic implications.

Three Outside Up Candlestick Pattern – Definition

Three outside up is a bullish candlestick pattern which generally indicates a strong bullish reversal in the security. This is a three-candlestick pattern that comprises a red candle followed by two consecutive green candles.

Three Outside Up Candlestick Pattern – Formation

A few things must be fulfilled before a three-candlestick pattern can be considered as three outside up candlestick pattern and they are as follows:

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  • The first candle must be a bearish candle(red candle) that is a part of the prior downtrend.
  • The second candle must be bullish (green candle) and it must completely engulf the previous candle. This means that the open price of the second candle must be lower than the previous candle’s close price and it should close above the open price of the previous candle.
  • The third candle also must be bullish (green candle) and this candle must close above the close price of the second green candle.

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Three Outside Up Candlestick Pattern – Psychology

The formation of Three Outside Up Candlestick pattern generally shows a change in the market sentiment and the appearance of this pattern during a downtrend indicates a potential reversal in the stock.

During a downtrend, the first red candle shows that there was more selling pressure in the stock. However, the next candle formed is a green candle which completely engulfs the previous red candle suggests that the buyers have overpowered the sellers in the stock.

The formation of the third green candle which closes above the close price of the second candle acts as a confirmation of the change in the market sentiment. This change in market sentiment can potentially bring in more buying pressure and hence the formation of this pattern is generally seen with a bullish momentum.

Three Outside Up Candlestick Pattern – Trading Ideas

Traders must ensure that the prior trend before the formation of this pattern is a downtrend. Once this pattern is formed in a downtrend, the following are the guidelines to take a trade:

  • ENTRY: When the price of the security starts trading above the close price of the third candle of the Three Outside Up Candlestick pattern, traders can take a long position.
  • TARGET: Traders can exit the trade when the price of the security reaches the immediate resistance zone. Once this level is reached, one can also book partial profits in the trade and hold on to the remaining position until the next resistance level.
  • STOP LOSS: Traders can place the stop loss near the low price of this pattern.

Three Outside Up Candlestick Pattern – Example

In the above one-day chart of AXIS BANK, we can observe the formation of the three outside up candlestick pattern after a short downtrend. As discussed above, the price of this stock saw a bullish reversal after the formation of this pattern.

At the time of the formation of this pattern, traders could have taken a long position above Rs. 620.25 and the stop loss was at Rs. 580.55

Three Outside Up Candlestick Pattern – Strengths

In certain scenarios, the Three Outside Up pattern carries enhanced significance for signalling a bullish reversal, particularly when it forms within a strong support zone. This zone, having repelled price action multiple times in the past, adds weight to the pattern’s implications. Its occurrence within this zone suggests that there is a demand for the stock near that price.

Moreover, coupling this pattern with the Relative Strength Index(RSI) can amplify its bullish reversal signal. If, at the pattern formation, the RSI indicates oversold conditions, it strengthens the case for bullish momentum. An oversold RSI implies prolonged selling pressure, presenting an opportune moment for buyers.

By combining these indicators, traders gain a more robust assessment of potential success, leveraging the pattern’s formation and RSI’s oversold signal for higher probability trades.

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Conclusion

A powerful instrument in a trader’s toolbox, the Three Outside Up candlestick pattern provides an obvious indication of a bullish turnaround following a downward trend. Traders may successfully use this pattern to their trading methods by comprehending its creation, psychology, and trading tactics.

But before making trading decisions, like with any technical indicator, it’s important to take into account other elements including market circumstances, trend strength, and risk management.

Written by Praneeth Kadagi

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.


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