Multiple Candlestick Patterns - Part 6

After studying the Three Inside patterns, Rajesh noticed another interesting behaviour on charts. Sometimes an Engulfing pattern would appear, and instead of reversing briefly, the market would continue strongly in the new direction on the following day as well.

He asked Priya, “Does that mean the reversal is stronger?”

Priya nodded. “Exactly. When an Engulfing pattern gets confirmation from the next candle, it forms what we call a Three Outside pattern.”

These patterns are considered powerful because they combine sudden dominance (Engulfing) with follow-through confirmation (third candle).

What Are Three Outside Patterns?

Three Outside patterns consist of three candles and are essentially an extension of the Engulfing pattern.

There are two types:

• Three Outside Up — Bullish reversal
• Three Outside Down — Bearish reversal

Three Outside Up — Bullish Reversal Pattern

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

Structure

It consists of three candles:

1. First candle: Bearish candle
2. Second candle: Bullish candle that engulfs the first candle (Bullish Engulfing)
3. Third candle: Another bullish candle closing higher

Psychology Behind Three Outside Up

Priya explained the sequence:

1. Sellers dominate initially and push prices lower.
2. Buyers suddenly enter aggressively, creating an engulfing candle.
3. In the next session, buyers continue to push prices higher.

This shows that control has shifted decisively from sellers to buyers.

Trade Approach for Three Outside Up

Risk Taker

• May enter near the close of the engulfing candle

Risk Averse Trader

• Waits for the third candle to confirm strength
• Enters after upward continuation

Stop-Loss for Three Outside Up

Stop-loss is usually placed below the lowest point of the pattern. If the price falls below this level, the bullish reversal is invalidated.

Three Outside Down - Bearish Reversal Pattern

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

Structure

It consists of three candles:

1. First candle: Bullish candle
2. Second candle: Bearish candle that engulfs the first candle (Bearish Engulfing)
3. Third candle: Another bearish candle closing lower

Psychology Behind Three Outside Down

Priya described the behaviour:

1. Buyers dominate and push prices upward.
2. Sellers suddenly take control, forming an engulfing candle.
3. The next session confirms continued selling pressure.

This indicates a decisive shift from bullish to bearish sentiment.

Trade Approach for Three Outside Down

Risk Taker

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

Risk Averse Trader

• Waits for confirmation from the third candle
• Enters only after continued weakness

Stop-Loss for Three Outside Down

Stop-loss is placed above the highest point of the pattern. If the price moves above this level, the bearish expectation fails.

Why Three Outside Patterns Are Powerful

Rajesh said, “So this pattern shows both takeover and continuation.”

Priya smiled. “Exactly. First, the new side takes control, then it proves that control is real.”

Compared to Three Inside patterns, Three Outside patterns often produce stronger moves because the reversal begins with aggressive participation.

Rajesh nodded thoughtfully. “So Engulfing starts the reversal, and the third candle confirms it.”

Priya replied, “Yes. It’s like the market not only changed direction but committed to it.”

Rajesh smiled. “That sounds like a pattern traders would trust.”

Priya said, “And that’s why confirmation patterns are so valuable.”

Key Takeaways

• Three Outside patterns extend the Engulfing pattern with confirmation.
• Three Outside Up signals a bullish reversal after a decline.
• Three Outside Down signals bearish reversal after a rise.
• The third candle confirms continuation in the new direction.
• Stop-loss is placed beyond the pattern’s extreme.
• These patterns indicate a strong sentiment shift and follow-through.