Three Outside Up Patterns

How to Trade a Three Outside Up Pattern

5 min read

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, each with a candlestick close above the previous one. Look for price action to rise above the fourth candle and hold for continuation upwards. 

A three outside up pattern consists of four candlesticks that form near support levels. The first candle is bearish, the second is a bigger bullish candle that forms a bullish engulfing, 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, this creates a different pattern with the same meaning.

Three outside up patterns form over three days. 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 there should be a downtrend 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, known as a 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.

Three Outside Up

Trading Three Outside Up Patterns

  • Watch for 1st smaller bearish candlestick to form
  • Next, watch for 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 stop below the 4th candle
  • Some traders take a short position once the price breaks below 4th candle
  • Then, place the stop above the 4th candle
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Three Outside Up 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 the day 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 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 of a real body the second candle has, the stronger the reversal. Always wait for confirmation.

Example

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.

Frequently Asked Questions

The three outside up pattern signifies a bullish reversal pattern. It's formed near the base of downtrends. This pattern starts with a bullish engulfing pattern and then continues with two more bullish candlesticks that continue the trend upwards.

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.

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