Three Outside Up and Down

The three outside up and down is a three-candle pattern in which the second candle engulfs the first candle entirely, and the third candle closes even further in the direction of the engulfing candle. It strengthens an already-strong two-candle reversal signal into a more decisive continuation setup.

The structure: engulfing plus push forward

The pattern unfolds in three clear stages. The first candle is a single bar that sets a direction—typically smaller in range, representing either a decline or a rise. The second candle then engulfs it completely: its open is beyond the first candle’s open in one direction, and its close is beyond the first candle’s close in the same direction. For the bullish version, the second candle opens below the first candle’s open and closes above the first candle’s close. This engulfing action shows a reversal in buying pressure. The third candle then extends the move: it closes higher than the second candle’s close (in the bullish case) or lower (in the bearish case).

The key visual difference from three inside up and down is that the second candle surrounds the first candle, not sits inside it. That surrounding action is more aggressive. It suggests that sellers (in the bullish case) stepped in decisively, overwhelmed the buyers, and the resulting pressure continues.

Why it signals momentum

An engulfing candle on its own is a reversal signal—it tells you that the prior direction has lost control. Adding a third candle that pushes further in the engulfing direction upgrades the signal from “reversal possible” to “reversal validated and accelerating.” The third candle proves that the reversal was not a momentary spike or a false breakout; it was genuine, and the market is pressing in the new direction.

This is stronger than it might initially appear. Many traders spot an engulfing candle and hesitate—they wonder if it will hold or if the prior trend will snap back. The three outside up and down removes that doubt. By showing a third close that goes even further, it demonstrates sustained demand (in the bullish case) or supply (in the bearish case). The reversal has legs.

Spotting it in different markets

In a downtrend, a bullish three outside plays out as follows: a small down candle (or a day of decline), followed by an up candle that opens lower and closes higher than that down candle (the engulfing action), then a third up candle that closes even higher. Visually, it looks like the down bar is completely surrounded and overpowered, with the market pressing higher again on the next day.

The bearish version is the inverse. At the top of an uptrend, you see a small up candle, then a down candle that opens above the first candle’s open and closes below its close (engulfing), then a third down candle that closes even lower. The bulls’ ground is surrendered decisively.

The pattern is most convincing when the first candle is notably smaller in range than the second; if they are nearly equal in size, the engulfing action is less clear and the signal is weaker. The third candle should also be a meaningful close beyond the second candle’s close—a tiny close that just edges beyond is less compelling than one that moves decisively.

Reliability in different contexts

The pattern tends to work well in trending markets where a reversal has just begun. If you see it early in a new trend, shortly after the old trend has started to fail, the probability of the new move continuing is good. The pattern is also more reliable on longer time frames—a daily or weekly three outside carries more weight than the same pattern on a one-minute intraday chart.

In choppy or sideways markets, the pattern is less useful because reversals are temporary and conflicting signals appear frequently. The pattern also weakens if it forms at an extreme where the market is already highly stretched. A three outside up at the very top of a parabolic rally, for instance, may be a bear trap—it looks like the uptrend is continuing, but the market may be rolling over.

One subtlety: the pattern must have the correct structure. A second candle that opens outside the first’s range but closes inside the first’s range is not a true engulfing pattern and therefore not a true three outside. The second candle must completely surround the first.

Using it in a trading plan

Many traders take the pattern as a signal to enter in the direction of the third candle’s close, with a stop placed above (for bearish setups) or below (for bullish setups) the second candle’s extreme. That stop placement is logical: if the reversal fails and the second candle is breached, the pattern has not delivered its message.

Position sizing and risk management are crucial. While the pattern is more reliable than a single engulfing candle, it is not guaranteed. Treating it as part of a systematic approach—combined with other confirmations like volume spike, a break above a trendline, or a test of support—yields better results than relying on the pattern in isolation.

The pattern also works well as a swing-trading entry point. If you are already biased toward a reversal based on moving averages or support and resistance, a three outside can act as a precise timing tool to enter that bias.

Comparison to similar patterns

The three outside up and down is distinct from the three inside because the second candle engulfs rather than sits inside. The three outside is also more aggressive in its signal. An engulfing pattern on a two-day chart is already strong; adding a third day of follow-through makes it stronger. The three inside, by contrast, is built on a harami—a gentler pattern—and the third candle merely confirms what the harami suggested.

See also