Three outside down patterns are bearish patterns. They are a four-candlestick pattern that takes place near resistance levels. The first candlestick is bullish. The next three candlesticks are bearish, each with a candlestick close below the previous one. Look for price action to fall below the fourth candle and hold for continuation downwards.
What Is a Three Outside Down Pattern?
A three outside down pattern consists of four candlesticks that form near resistance levels. The first candle is bullish, the second is a bigger bearish candle that forms a bearish engulfing, and the other two candles form lower highs. Typically, the fourth candle forms a bearish reversal pattern.
Three outside down patterns are a bearish engulfing pattern with confirmation. Add the third candlestick, and you get a different, stronger pattern that means the same thing.
Three outside down patterns form over three days. The first two days form another smaller bearish reversal pattern, the bearish engulfing pattern.
For the three outside down patterns to form, there needs to be a trend in place. In this case, an uptrend. The trend does not have to be long-term, but the longer, the better.
Three Outside Down Pattern Basics
The first candlestick that forms is a small bullish candlestick. This candle is a part of the current trend. The next candle that forms is a bearish one. This candle has a long real body that completely engulfs the first one, a bearish engulfing pattern.
The last candle confirms the bearish reversal pattern; another bearish candlestick. This one now says that a new trend is in place.
Technicals
The bulls are in control when three outside patterns form. The bears are done letting them have that control, so they step in. The first candle in the pattern is typically small, usually made up of different types of doji candlesticks.
In essence, while the bulls may be in control, there is some indecision on whether or not that trend will continue. The next day opens higher than the formation of the first candle. This, in turn, will have traders thinking the trend will continue, but instead, the price falls.
It falls to engulf the first candle, alerting traders to a complete reversal. Traders can see this bearish engulfing pattern and decide to get into a trade based on that pattern alone.
Some traders may wait for the confirmation candle that turns it into three outside down patterns. This gives extra reassurance that the trend is reversing.
The stronger the uptrend, the stronger the bearish reversal will be. Also, the longer the second and third candles are, the stronger the reversal. Please be sure to use proper risk management techniques when trading a three outside down pattern.
Three Outside Down Pattern Trading Strategy
- Watch for 1st smaller bullish candlestick to form.
- Next, watch for the 2nd bigger bearish candlestick to engulf 1st bullish one.
- Then, watch for 3rd & 4th candlesticks to form lower highs.
- Traders take a short position once the price breaks below the 4th candlestick.
- Place a stop above the 4th candle.
- Some traders take a long position once the price breaks above the 4th candle.
- Then place a stop below the 4th candle.
