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 basically 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 the span of three days. The first two days form another smaller bearish reversal pattern known as the bearish engulfing pattern.

For the three outside down pattern to form there needs to be a trend in place. In this case, it’s an uptrend. We know that the trend doesn’t have to be long term but it does help.

The first candlestick that forms is a small bullish candlestick forms. This candle is apart of the current trend in place. 

The next candle that forms is a bearish one. This candle has a long real body that completely engulfs the first one. Hence the bearish engulfing pattern.

The last candle the forms is a confirmation of the bearish reversal pattern. It’s another bearish candlestick. This one now says that there’s a new trend in place.

How to Trade Three Outside Down Patterns

• Watch for 1st smaller bullish candlestick to form
• Next, watch for 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 price breaks below the 4th candlestick
• Place stop above the 4th candle
• Some traders take a long position once price breaks above 4th candle
• Then place stop below the 4th candle

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 price falls.

It falls to completely engulf the first candle alerting traders to a reversal. Traders can see this bearish engulfing pattern and decide to get into a trade based off that that pattern alone.

Some traders may wait for the confirmation candle that turns it into three outside down patterns. This just gives extra reassurance that the trend is in fact reversing.

The strong the uptrend though, the strong the bearish reversal will be. Also, the longer the second and third candles are, the stronger the reversal also.