Three outside-up patterns are bullish. They are a four-candlestick pattern that takes place near support levels. The first candlestick is bearish. The next three candlesticks are bullish, with each having a close above the previous one. Look for price action to rise above the fourth candle and hold for continuation upwards.
What Is a Three Outside Up Pattern?
A three outside up pattern consists of four candlesticks that form near support levels. The first candle is bearish, the second is a larger bullish candle that forms a bullish engulfing pattern, and the other two candles form higher highs. Typically, the fourth candle forms a bullish reversal pattern.
The three outside up comprise another bullish reversal pattern, the bullish engulfing pattern. The bullish engulfing pattern is a two-candlestick pattern. When the third candle is added, a different pattern emerges with the same meaning.
Three outside up patterns form over a three-day period. The first two days form another bullish reversal pattern, and the third day confirms it.
A trend needs to be in place to be able to reverse it. For the three outside up pattern, a downtrend should be in place. The downtrend may not be a long-term one. Sometimes, a couple of days is all it needs.
Then, the first candlestick forms. It is a small, bearish candle that continues with the current downtrend.
Next, a second candlestick forms. This one is a long, bullish one. It engulfs the real body of the first candle, a characteristic of the bullish engulfing pattern. In other words, it opened lower and closed higher than the previous candle.
Lastly, the third candlestick is another bullish candlestick. This one confirms the new trend that is in place.
Technicals
Three outside-up patterns tell the bulls are done, giving the bears control. While the first candlestick of the pattern is a part of the downtrend in place, change is coming.
On the second day, the bulls take the bears out. They completely engulfed the previous day, but it did not start that way. It opens lower than the previous day, making you believe the trend will continue. The boom, the bulls come in and take over.
Next comes the confirmation. This, in turn, makes the reversal that much more likely. Traders can get in on the second day, believing in the two-day reversal pattern.
Other traders may wait for the third day to get confirmation. They do not want to get trapped in a fake-out. Although the more substantial the body of the second candle, the stronger the reversal. Always wait for confirmation.
Three Outside Up Example
This is an example of a three outside up pattern on a 5-minute chart of $JPM. Note that the black line on the chart was the premarket high. You’ll see how price action formed a bullish engulfing and inverse head and shoulders pattern right below. This is when the consolidation happened. The consolidation is what formed the right shoulder area.
Then, price action formed the three outside up pattern and broke the premarket high. It reversed for a bit and then formed a hammer that held support. Then, it completed a morning star pattern, which continued the uptrend. Please be sure to use proper risk management techniques when trading a three outside up pattern.
Three Outside Up Pattern Trading Strategy
- Watch for 1st smaller bearish candlestick to form.
- Next, watch for the 2nd bigger bullish candlestick to engulf 1st bearish one.
- Then, watch for 3rd & 4th candlesticks to form higher highs.
- Traders take a long position once the price breaks above the 4th candlestick.
- Place a stop below the 4th candle.
- Some traders take a short position once the price breaks below the 4th candle.
- Then, place the stop above the 4th candle.
Frequently Asked Questions
The three outside up pattern signifies a bullish reversal pattern. It's formed near the base of downtrends. This pattern begins with a bullish engulfing pattern and is followed by two additional bullish candlesticks that reinforce the upward trend.
The three gap rule consists of three gap patterns that form during an uptrend. Traders need to be aware that the trend will eventually reverse, and that's when the gaps to the downside could be filled.
