The Three Inside up and Three Inside Down patterns are two candlestick patterns belonging to the family of candlestick price reversal patterns.
Each of these patterns consists of three consecutive candlesticks arranged in a specific sequence to indicate a price reversal.
Three Inside Up Candlestick Pattern
What are Three Inside Up Candlestick Patterns?
The three inside up pattern is a bullish reversal pattern. This pattern occurs at the end of a bear trend. This pattern consists of three candlesticks. First, two of these are inside bars, followed by a bullish candlestick giving rise to a bullish reversal pattern.
Three inside up meaning
It is a pattern of three candles. The third candle is a large bullish candle. The third bullish candle rises above the range. The high of the third green candle reaches far above the high of the other two candles.
This pattern has some salient features. The first candle is a bearish candle, This candle is a part of the prevailing bearish trend.
The second candle is formed as a short candle and forms inside the body of the first candle forming an inside bar.
The third candle is a bullish candle. It closes above the high of the previous candle.
The combination of these three candlesticks is believed to start a bullish reversal pattern.
Read about candlesticks: Important Candlestick Patterns
What Does Three Inside Up Pattern Tell Us?
The candlesticks are very unique. Every candle, it seems, has its own story prepared for us. It depends on how good the trader can interpret that. The three inside up candles have their stories for us, Combined, their story makes it significant for price movement.
The three inside up pattern is formed at the bottom of a bear trend. The first candle is a large bearish candle. This the part of the prevailing downtrend. This red candle takes the price further down indicating that the bears are still in control. The second candle is an inside candle. It is a green candlestick, albeit small. The second candlestick shows that after all the fight between bulls and bears, the bulls own and took control of the condition.
The second candle is vital in its role. If it was not a green and inside candle, the pattern will not be valid. The reversal will not occur. The second candle tells us finally the bears are exhausted and therefore lost their momentum. There doesn’t seem to be any initiative left in them.
The third candle completes the story here. Taking a cue from the second candle, the third candle shows the strength of bulls. Having been defeated, the bears left the warfield. Very few are expecting the price will go down further. Hence, the selling is minimal. Taking advantage of the situation, the bulls enter and start to take the price higher.
This is the reason the third candle, which is a green candle, takes the price higher and closes at the highest of the previous two candles.
But it must be noted that bears do not give up easily. At the slightest chance, bears may return anytime in future. Therefore it is necessary to get confirmation from other indicates to be assured of the current trend and its strength.
Interpretation of Three Inside Up Pattern
The trader assumes that the bear trend is still on during the first candle. They expect that price will come down further. Hence, the candle opens inside the first bearish candlestick to take the price further downwards. But continuous selling and fighting with the bulls left the bears exhausted.
Bulls start buying the stock and take the price upwards. But some traders who want to take the stock down, sell. Eventually, bears buy whatever is put up for sale. This fighting continues between bulls and bears. But bulls win ultimately and take the price up resulting in a positive closing price. There are wick and shadow to represent the infighting.
The third candle is a sure shot for the bulls. The exhausted bears can present little fight. Bulls win the war and take the price at the highest point of the three candles and close the price nearby there.
As this pattern occurs at the end of a bear trend, bulls march forward after winning in an attempt to overthrow the control of the bears.
Traders using this pattern should keep in mind that bears may return anytime and try to pull the price back. It is better if the bullish move comes after clearing a major resistance level. Or the bullish candle itself clears the resistance.
Example of Three Inside Up Patterns in a Chart
This pattern should be used as an alert for price reversal but not for trading. Let,s see the pattern in the following chart.
We can see the pattern highlighted in the chart. The pattern appeared near the low of the downtrend. After the third bullish candle appeared, the price started going up. And slowly but surely, the uptrend began. The bullish reversal, in this case, took the price very high, even higher than the previous top of the stock.
How to Trade The Three Inside Up Patterns?
As already mentioned earlier, The pattern itself does not generate any trading signal unless other indicators support the trend. It is better to check whether the stock is in an oversold condition or not. If the oscillator like RSI, Stochastic or MACD shows that the stock has already reached an oversold condition is better to take a trade.
Trading strategy
We can prepare some conditions to find a trading strategy.
- It is good for trading if the market has already reached an oversold condition and trying to recover.
- If the third bullish candle crosses or already crossed an important resistance level.
- The trading volume must support the upmove. Meaning that the volume should rise with the bullish candles. Or if a volume divergence already occurred at the end of a downtrend.
See the chart above. The pink circle shows the inside up pattern. Just above the high of the third candle, the trader enters which is shown by the green line. The trader sells the stock when the uptrend is broken, as shown by the red line. The stop loss for the trade is below the low of the first candle, as shown by the black line.
Three Inside Down Candlestick Pattern
Similar to the three inside up pattern, the three inside down pattern also contains three candlesticks. But these are different. Because this is a bearish reversal pattern.
What Are Three Inside Down Candlestick Patterns?
This is a bearish reversal pattern. It is at or near the top of a bullish trend, The three inside down pattern consists of three candlesticks arranged in a typical manner.
In this pattern, the first candle is a large bullish candle. The second is a small inside bearish candle and the third is a large bearish candle. This pattern is considered an alert for an imminent price reversal.
Structure of Three Inside Down Patterns
The standard structure of this pattern consists of three candles. The first candle is a large green candle which appears to be a part of the bullish trend.
The second candle is a smaller bearish inside candle. The second candle should be at least half in length of the first candlestick.
The third candle is a large bearish candle that extends beyond the low of the first candle. The closing price of the third candle goes below the opening price of the first candle.
Variations
The three inside down pattern has three variants.
All three of the above are variants of the inside down pattern.
The first one (A), has two bearish candlesticks. These two form a bearish Harami pattern.
Read more: Harami Candlestick Pattern
The second candlestick in (B) is a pin bar candlestick.
The third variant (C) is a little different. The first two candles in this variant have formed a Dark Cloud Cover pattern.
How to Trade Three Inside Down Candlestick Pattern?
The three inside down pattern can only be traded if it is supported by other oscillators.
Oscillators must show an overbought zone at or before the formation of this pattern.
The pattern should form at or near the top of the bullish trend.
The third bearish candlestick should be backed by rising volume.
After everything falls into pieces, the trader prepares to trade the pattern. The trader sells/ shorts the stock below the body of the third bearish candle.
The stop loss is kept above the high of the second candle. The profit-taking can be done at a 1:2 risk/ reward ratio. Or if the trader is more aggressive, the trade can be maintained with a trailing stop loss. The exit should be made at the next uptrend.
The Success Rate of Three Inside Up and Three Inside Down Patterns
Both of the candlestick patterns discussed above are not accurate as many others. Many times we see the reversal signals were not valid after a pullback. A statistical report says only around 35.4% of total reversals gave a profit at a 1:2 risk/ reward ratio. That profit could be made only after the reversals were valid.
2:1 target reached only 35.4% of the time. Most of the reversals were stopped out before reaching the profit target. In Forex trades, only Rs 62 could be made on every Rs 1000 risked. The statistics shown in the above picture have given detailed information about the success rate. But one important point to note is that in an analysis of a total of 4120 markets, 72.8% of times the three inside up and three inside down patterns were confirmed.
Bottomline
Traders trading these candlestick patterns are advised to confirm their trades from other technical indicators and volumes. It is better if the third candle breaches strong support or resistance line. This increases their chance of profit.
As we have found that the success rate is not very high historically, the traders should not only trade in these patterns alone.
FAQs
What is a three inside up candlestick pattern?
The three inside up pattern is a bullish reversal pattern. This pattern occurs at the end of a bear trend. This pattern consists of three candlesticks.
What do 3 bullish candles mean?
3 bullish candles mean that there are three green candlesticks.
What is the most powerful candlestick pattern?
Many candlestick patterns are favoured by traders due to their ease of execution and success rate. But there’s nothing as the most powerful candlestick pattern.
What is three inside down candlestick pattern?
The three inside down pattern consists of three candlesticks arranged in a typical manner.
What is the 3 candles rule?
When 3 candles of the same color are arranged consecutively, it is believed that the fourth candle will be of the opposite color. This is 3 candle rule.
What do 3 bearish candles mean?
When three bearish candles appear together, it is called 3 bearish can
