Everything that you need to know about the Three Outside Down candlestick pattern is here.
Today you’ll learn:
- What Is The Three Outside Down Candlestick Pattern
- How To Identify The Three Outside Down Candlestick Pattern
- Variants Of The Three Outside Down Candlestick Pattern
- How To Trade The Three Outside Down Candlestick Pattern
- Strategies To Trade The Three Outside Down Candlestick Pattern
- Strategy 1: Pullbacks On Naked Charts
- Strategy 2: Trading The Three Outside Down With Resistance Levels
- Strategy 3: Trading The Three Outside Down With Moving Averages
- Strategy 4: Trading The Three Outside Down With RSI Divergences
- Strategy 5: Trading The Three Outside Down With Fibonacci
- Strategy 6: Trading The Three Outside Down With Pivot Points
- What Is The Success Rate Of The Three Outside Down?
- This is what you learned today
- Learn More
What Is The Three Outside Down Candlestick Pattern
The Three Outside Down is a Japanese candlestick pattern.
It’s a bearish reversal pattern.
Usually, it appears after a price move to the upside and shows rejection from higher prices.
The pattern is bearish because we expect to have a bear move after the Three Outside Down appears at the right location.
It’s a reversal pattern because before the Three Outside Down appears we want to see the price going up, thus it’s also a frequent signal of the end of a trend.
The Three Outside Down pattern is also a mirrored version of the Three Outside Up candlestick pattern.
How To Identify The Three Outside Down Candlestick Pattern
The Three Outside Down candlestick pattern is formed by three candles.
Here’s how to identify the Three Outside Down candlestick pattern:
- The first candle is bullish and small
- The second candle is bearish and engulfs the first one completely
- The third candle is bearish and closes below the other ones
It looks like this on your charts:
Variants of the Three Outside Down Candlestick Pattern
The Three Outside Down candlestick pattern may appear a little different on your charts:
The candles may have big wicks at the top, like Inverted Hammer candles
Here’s what it may look like on your charts:
How To Trade The Three Outside Down Candlestick Pattern
To trade the Three Outside Down candlestick pattern it’s not enough to simply find a series of candles with the same shape on your charts.
Let me explain.
What makes a pattern valid is not just the shape, but also the location where it appears.
This means that the same shape appearing at different locations may have different meanings.
When trading the Three Outside Down, we want to see the price first going up, making a bullish move.
A Three Outside Down appearing after this bullish move is a sign of a possible reversal to the downside.
It looks like this:
Now you’re thinking.
“When do I open my trade?”
It’s simple, the Three Outside Down pattern is traded when the low of the last candle is broken.
That’s your conservative trigger to short.
It looks like this:
Now, you also want to protect yourself because when trading things don’t always move as we expect.
And for that, we use a stop loss.
There are several different types of stop losses.
The most common is to use the other side of the pattern to set it.
Like this:
But wait, don’t jump into trading the Three Outside Down right yet.
There are a few more things to know.
Ideally, to increase the accuracy, we want to trade the Three Outside Down candlestick pattern by combining it with other types of technical analysis or indicators.
Here are a few strategies to trade the Three Outside Down pattern.
Strategies To Trade The Three Outside Down Candlestick Pattern
Strategy 1: Pullbacks On Naked Charts
As a bearish reversal pattern, the Three Outside Down is a great pattern to watch for when the price is on a downtrend.
Just wait for a pullback to start, and then spot when the Three Outside Down appears.
That often signs the end of the pullback and the start of the new leg to the downside.
Here’s an example:
Strategy 2: Trading The Three Outside Down With Resistance Levels
Support and resistance levels are great places to find price reversals.
Since we are looking for moves to the downside, we want to trade the Three Outside Down using resistance levels.
How does it work:
- Draw resistance levels on your charts
- Wait for the price to go up and hit the resistance level
- Check if a Three Outside Down appears at that level
- Short when the price breaks the low of the last candle of the Three Outside Down
- Set your stop loss and take profit levels, and expect a move to the downside
Here’s an example:
Strategy 3: Trading The Three Outside Down With Moving Averages
Moving averages are great trading indicators to trade trends.
The idea here is to trade pullbacks to the moving average when the price is on a downtrend.
How does it work:
- Find a downtrend, with the price jumping below a moving average
- Wait for the price to go up and hit the moving average
- Check if a Three Outside Down appears at the moving average
- Short when the price breaks the low of the last candle of the Three Outside Down
- Set your stop loss and take profit levels, and expect another leg to the downside
Here’s an example:
Strategy 4: Trading The Three Outside Down With RSI Divergences
This is a bit different from the other trading strategies.
To find a bearish RSI Divergence we want to see the price on an uptrend first, making higher highs and higher lows.
Here’s how it works:
- Find an uptrend
- Mark the highs that the price makes after each leg to the upside
- At the same time compare the price highs with the RSI indicator
- When you see the RSI making lower highs while the price making higher highs, you found your divergence
- Now you wait until a Three Outside Down appears at a price higher high, aligned with an RSI lower high.
- Short when the price breaks the low of the last candle of the Three Outside Down
- Set your stop loss and take profit levels, and expect a move to the downside.
It looks like this:
Strategy 5: Trading The Three Outside Down With Fibonacci
Another popular way of trading the Three Outside Down pattern is using the Fibonacci retracement tool.
Fibonacci shows retracement levels where the price will tend to revert frequently.
Depending on the strength of the trend, different levels are more likely to work better with the Three Outside Down pattern. Here you can learn more about the different Fibonacci retracement levels.
Here’s how the strategy works:
- You want to see the price on a downtrend, or at the start of a new one
- Then you wait for a move to the upside, they always happen at some point
- Pick your Fibonacci tool and draw the levels from the high to the low of the move
- When the price hits a Fibonacci level and prints a Three Outside Down, that’s what you are waiting for
- Short when the price breaks the low of the last candle of the Three Outside Down
- Set your stop loss and take profit levels, and expect a move to the downside
Here’s an example:
Strategy 6: Trading The Three Outside Down With Pivot Points
Pivot Points are automatic support and resistance levels calculated using math formulas.
If you are day trading, the Daily Pivot Points are the most popular, although the Weekly and Monthly are frequently used too.
Here’s how to trade the Three Outside Down pattern with Pivot Points:
- Activate the Pivot Points indicator on your charts
- Check which Pivot Points are above the price, those will tend to work as a resistances
- Ideally, you want to see the price on a downtrend, although it’s not required
- Wait for a price move to the upside to a Pivot Point level
- At that level, you want to see the Three Outside Down pattern appearing, meaning that the level is being rejected
- Short when the price breaks the low of the last candle of the Three Outside Down
- Set your stop loss and take profit levels, and expect a move to the downside
What Is The Success Rate Of The Three Outside Down?
According to the Encyclopedia of Candlestick Charts by Thomas N. Bulkowski (link), the Three Outside Down candlestick pattern has a success rate of 70%.
This is what you learned today
- The Three Outside Down is a three-candle pattern.
- To be valid, it must appear after a move to the upside.
- It’s a bearish reversal pattern, meaning that it signs a potential reversal to the downside.
- To increase the accuracy, you can trade the Three Outside Down using pullbacks, moving averages, and other trading indicators.
- The winning rate of the Three Outside Down is 70%.
Now I want to hear from you.
Do you trade the Three Outside Down candlestick pattern?
Let me know in the comments below.
Learn More
- List of all candlestick patterns explained
