Multiple Candlestick Patterns - Part 5

After learning about the Morning Star and Evening Star patterns, Rajesh began to notice something familiar in certain charts - sometimes a Harami pattern would appear first, followed by a strong candle in the opposite direction. He asked Priya whether that combination had any significance.

Priya nodded. “Very sharp observation. When a Harami is followed by confirmation, it forms a stronger pattern called the Three Inside pattern.”

These patterns are considered reliable because they combine loss of momentum (Harami) with clear confirmation (third candle).

What Are Three Inside Patterns?

Three Inside patterns consist of three candles and are essentially an extension of the Harami pattern.

There are two types:

• Three Inside Up: Bullish reversal
• Three Inside Down: Bearish reversal

Three Inside Up - Bullish Reversal Pattern

The Three Inside Up pattern appears after a downtrend and signals a potential upward reversal.

Structure

It consists of three candles:

1. First candle: Large bearish candle
2. Second candle: Small candle within the first candle’s body (Harami)
3. Third candle: Strong bullish candle closing above the first candle

Psychology Behind Three Inside Up

Priya explained the progression:

1. Sellers dominate the market and push prices lower.
2. A small candle forms inside the previous candle, and momentum weakens.
3. Buyers step in strongly on the third session.
4. The third candle confirms that control has shifted.

This sequence shows a complete transition from bearish to bullish sentiment.

Trade Approach for Three Inside Up

Risk Taker

• May enter near the close of the third candle

Risk Averse Trader

• Waits for additional confirmation
• Enters only if prices continue rising

Stop-Loss for Three Inside Up

Stop-loss is typically placed below the lowest point of the pattern. If price breaks below this level, the bullish reversal fails.

Three Inside Down - Bearish Reversal Pattern

The Three Inside Down pattern appears after an uptrend and signals a potential downward reversal.

Structure

It also consists of three candles:

1. First candle: Large bullish candle
2. Second candle: Small candle within the first candle’s body (Harami)
3. Third candle: Strong bearish candle closing below the first candle

Psychology Behind Three Inside Down

Priya described the behaviour:

1. Buyers dominate and push prices higher.
2. A small candle indicates hesitation and weakening momentum.
3. Sellers step in strongly on the third day.
4. The bearish candle confirms loss of bullish control.

This pattern signals that the uptrend may be ending.

Trade Approach for Three Inside Down

Risk Taker

• May initiate a short trade near the close of the third candle

Risk Averse Trader

• Waits for confirmation of continued weakness

Stop-Loss for Three Inside Down

Stop-loss is placed above the highest point of the pattern. If the price moves above this level, the bearish view becomes invalid.

Why Three Inside Patterns Are Important

Rajesh said, “So this pattern basically confirms that the Harami wasn’t just random.”

Priya nodded. “Exactly. Harami alone shows hesitation. The third candle proves that a new trend is actually starting.”

These patterns reduce false signals because they include confirmation before action.

Rajesh smiled. “I like this pattern - it doesn’t rush. It waits for proof.”

Priya laughed. “That’s why many cautious traders prefer confirmation patterns. They trade less, but with higher confidence.”

Rajesh replied, “Makes sense. Better to be slightly late than completely wrong.”

Priya nodded. “Exactly.”

• Three Inside patterns are extensions of Harami patterns.
• Three Inside Up signals a bullish reversal after a decline.
• Three Inside Down signals bearish reversal after a rise.
• The third candle provides confirmation of a trend change.
• Stop-loss is placed beyond the pattern’s extreme.
• These patterns are considered more reliable than Harami alone.