How to Trade Three Outside Down Patterns

Three outside down patterns are bearish patterns. They are a four candlestick pattern that takes place near resistance levels. The first candlestick is a bullish candlestick. The next three candlesticks are bearish and each have a candlestick close below the previous one. Look for price action to fall below the fourth candle and hold for continuation downwards. Watch our video on how to identify and trade three outside down patterns.

What Is a Three Outside Down Pattern & How to Identify These Patterns?

A three outside down pattern consists of four candlesticks that form near resistance levels. The 1st candle is bullish, the 2nd is a bigger bearish candle that forms a bearish engulfing, and the other 2 candles form lower highs. Typically, the 4th candle forms a bearish reversal pattern.

These patterns are made up of three candlesticks. The three outside down pattern is a bearish reversal pattern found on stock charts. Watch our video above to learn more about how to trade these patterns. 

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.

Candlesticks allow us as traders to be able to see the emotions of others. Emotions move markets. They always have. In fact, that’s the reason we have Japanese candlesticks patterns today.

Even back in the 17th century, emotions along with price action affected supply and demand of commodities. Rice trader Homma developed a way to see how all that worked together. In fact, we still use his methods to this day (bookmark our penny stocks list and stock watch lists pages, which are updated daily).

Basics of Three Outside Down Patterns

Three Outside Down Patterns

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. Read our post on bullish candlesticks to learn more about them.

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 (bookmark our stocks lists page which is updated daily).

Technicals of Three Outside Down Patterns

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. Take our candlestick reversal patterns course.


Technical indicators come in handy when trading different patterns. Together with candlesticks they form key support and resistance levels. All traders know how important support and resistance trading is.

Moving averages also provide equilibrium to stocks. When a stock gets overextended, it’ll always come back to its equilibrium i.e. moving average lines.

Not only do moving averages provide support and resistance, they also give buy and sell signals. Moving average crossovers affect a stock’s price as well.

Patterns are another incredibly important part of trading. Patterns make up every single chart. They’re also act as buy and sell signals.

Patterns break down all the time though. This is because bullish and bearish patterns are constantly forming within each other. Triangles patterns such as symmetrical triangle patterns make up the large patterns.

Then they break down into the small patterns like double top patterns. Then go even smaller with the two and three candlestick patterns. For example, three outside down patterns.

Patterns coupled with moving averages help make traders more successful than going in blind. Hence the need for studying.

Looking to learn stock trading? Take our free online trading courses to help you get started.

How to Trade Three Outside Down Patterns

  • 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

three outside down


3 outside down patterns are bearish reversal patterns. You can find them on any chart time frame. Whether you’re using day trading strategies that work or options trading strategies, make sure you can see patterns as well as moving average confirmation.

It’s important to spend the time studying as well as practicing. Open a paper trading account and make hundreds of practice trades. This allows you to be able to spot any and all patterns as well as working out the kinks. 

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