Three Outside Up
The Three Outside Up pattern is a commanding bullish reversal signal in technical analysis, often surging at the bottom of a downtrend. Picture it as a bullish overtake - three candles where a bearish decline is engulfed by a larger bullish rally, then reinforced by a decisive climb - overwhelming the bears with force. When this pattern forms, it’s a powerful declaration that bearish momentum is capitulating, offering traders a chance to buy or go long as an uptrend storms upward.
How to Identify the Three Outside Up Pattern in Trading
The Three Outside Up is a bullish reversal candlestick pattern. It appears at the end of a downtrend when a bearish move is engulfed and overpowered by strong bullish momentum, confirmed by a third candle. Here’s the step-by-step guide.
Start with the Big Picture
This pattern forms after a downtrend. It shows sellers losing grip as buyers step in aggressively, setting up a potential reversal.
Trace the Candle Sequence
The setup develops over three candles:
- First Candle: A bearish candle, continuing the downtrend — usually modest in size.
- Second Candle: A long bullish candle, fully engulfing the first candle’s body, signaling buyers taking control.
- Third Candle: Another bullish candle that closes above the second candle’s high, sealing the reversal with continued buying pressure.
Zero in on the Confirmation Level
The confirmation level is the high of the second candle. A close above this level by the third candle validates the bullish reversal. A close above the first candle’s high adds even stronger conviction.
Watch the Breakout
The bullish trigger comes when the third candle closes above the second candle’s high. That’s your entry point, showing the bulls have fully reversed the trend.
Check Volume for Additional Confirmation
Volume behavior can strengthen the signal:
- Rises on the second candle, showing the engulfing surge.
- Spikes or holds high on the third candle, reinforcing buyer dominance.
Rise Surge: Measure the second candle’s body or use nearby resistance levels to project a realistic price target upward from the third candle’s close.
How to Trade the Three Outside Up Pattern (Trading Example)
To illustrate how the Three Outside Up pattern can be used to enter a trade, we will choose the ADAUSDT pair. This bullish reversal signal occurred on the daily chart, setting the stage for a momentum-based rally after prior consolidation.
Analysis
On March 14, 2023, ADAUSDT formed a well-defined Three Outside Up pattern. The structure began with a small bearish candle, followed by a large bullish candle that completely engulfed the previous one, and then a third bullish candle that confirmed the reversal. This pattern appeared after a minor decline, indicating a shift in control from sellers to buyers.
Trade Setup
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Entry: The long position was entered on March 14, 2023, at $0.3434, immediately following the breakout above the engulfing candle. Confluence included:
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Exit: The trade was exited on April 15, 2023, at $0.449, near a previous support/resistance zone that acted as a ceiling for multiple prior moves.
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Outcome: The Three Outside Up setup produced a 30.8% gain, capturing a clear and efficient bullish swing with a textbook confirmation setup.
Risk Management
- Stop-Loss placement: The stop-loss was set at $0.3006, just below the pattern’s low, which would have invalidated the bullish structure.
- Position sizing: The position was sized using a 2% capital risk rule, accounting for the distance from entry to stop-loss.
- Risk-Reward Ratio: The trade achieved a Risk-Reward Ratio of 1:2.47, offering a clean and favorable reward profile.
- Volatility Consideration: Entry followed a period of compression in Volatility, which expanded following the engulfing breakout, fueling the rally.
- Adaptive Exit Strategy: Partial scaling at Fibonacci extensions or trailing stops could have helped capture further upside in trend continuation scenarios.
Volume Lift: A volume spike on the second and third candles surges the pattern into a bullish rise, sealing the reversal’s might.
Pre-Trade Checklist
Surge the Proof: Pair the pattern with volume surges and indicators like RSI to dodge fakes and boost your odds.
Key Points
- Engulfing Strength: A modest first candle, engulfed by a large second, and a strong third boost reliability - weak engulfing dilutes it.
- Time Frame: Rises strongest on daily or weekly charts after downtrends.
- Combine with Indicators: Use moving averages or RSI to confirm the reversal.
- Breakout Confirmation: A close above the second candle’s high sets the rise - third candle strength is crucial.
- Price Target: Measure the second candle’s body or use resistance levels for a target above the close.
- Risk Management: Set a stop-loss below the first candle’s low to limit losses if it fails.
Wait for the Surge: Acting before the third candle confirms risks an outside trap - let the reversal overpower.
Conclusion
The Three Outside Up pattern is a trader’s commanding tool for catching bullish reversals. Its engulfing surge, paired with volume, RSI, and moving averages, can overpower into big gains. Whether in crypto, stocks, or forex, this pattern sharpens your edge. Stay vigilant, manage your risk, and let the outside rise - that forceful surge could climb into a winning trade.