Everything that you need to know about the Three Outside Up candlestick pattern is here.
Today you’ll learn:
- What Is The Three Outside Up Candlestick Pattern
- How To Identify The Three Outside Up Candlestick Pattern
- Variants Of The Three Outside Up Candlestick Pattern
- How To Trade The Three Outside Up Candlestick Pattern
- Strategies To Trade The Three Outside Up Candlestick Pattern
- Strategy 1: Pullbacks On Naked Charts
- Strategy 2: Trading The Three Outside Up With Support Levels
- Strategy 3: Trading The Three Outside Up With Moving Averages
- Strategy 4: Trading The Three Outside Up With RSI Divergences
- Strategy 5: Trading The Three Outside Up With Fibonacci
- Strategy 6: Trading The Three Outside Up With Pivot Points
- This is what you learned today
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What Is The Three Outside Up Candlestick Pattern
The Three Outside Up is a Japanese candlestick pattern.
It’s a bullish reversal pattern.
Usually, it appears after a price decline and shows rejection from lower prices.
The pattern is bullish because we expect to have a bull move after the Three Outside Up appears at the right location.
It’s a reversal pattern because before the Three Outside Up appears we want to see the price going down, thus it’s also a frequent signal of the end of a trend.
The Three Outside Up pattern is also a mirrored version of the Three Outside Down candlestick pattern.
How To Identify The Three Outside Up Candlestick Pattern
The Three Outside Up candlestick pattern is formed by three candles.
Here’s how to identify the Three Outside Up candlestick pattern:
- The first candle is bearish and small
- The second candle is bullish and engulfs the first one completely
- The third candle is bullish and closes above the other ones
It looks like this on your charts:
Variants of the Three Outside Up Candlestick Pattern
The Three Outside Up candlestick pattern may appear a little different on your charts:
The candles may have big wicks at the bottom, like hammer candles
Here’s what it may look like on your charts:
How To Trade The Three Outside Up Candlestick Pattern
To trade the Three Outside Up candlestick pattern it’s not enough to simply find a pattern 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 Up, we want to see the price first going down, making a bearish move.
A Three Outside Up appearing after this bearish move is a sign of a possible reversal to the upside.
It looks like this:
Now you’re thinking.
“When do I open my trade?”
It’s simple, the Three Outside Up pattern is traded when the high of the last candle is broken.
That’s your conservative trigger to go long.
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 Up right yet.
There are a few more things to know.
Ideally, to increase the accuracy, we want to trade the Three Outside Up candlestick pattern by combining it with other types of technical analysis or indicators.
Here are a few strategies to trade the Three Outside Up pattern.
Strategies To Trade The Three Outside Up Candlestick Pattern
Strategy 1: Pullbacks On Naked Charts
As a bullish reversal pattern, the Three Outside Up is a great pattern to watch for when the price is on an uptrend.
Just wait for a pullback to start, and then spot when the Three Outside Up appears.
That often signs the end of the pullback and the start of the new leg to the upside.
Here’s an example:
Strategy 2: Trading The Three Outside Up With Support Levels
Support and resistance levels are great places to find price reversals.
Since we are looking for moves to the upside, we want to trade the Three Outside Up using support levels.
How does it work:
- Draw support levels on your charts
- Wait for the price to decline and hit the support level
- Check if a Three Outside Up appears at that level
- Go long when the price breaks the high of the last candle of the Three Outside Up
- Set your stop loss and take profit levels, and expect a move to the upside
Here’s an example:
Strategy 3: Trading The Three Outside Up 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 an uptrend.
How does it work:
- Find an uptrend, with the price jumping above a moving average
- Wait for a decline in the price to the moving average
- Check if a Three Outside Up appears at the moving average
- Go long when the price breaks the high of the last candle of the Three Outside Up
- Set your stop loss and take profit levels, and expect another leg to the upside
Like this:
Strategy 4: Trading The Three Outside Up With RSI Divergences
This is a bit different from the other trading strategies.
To find a bullish RSI Divergence we want to see the price on a downtrend first, making lower lows and lower highs.
Here’s how it works:
- Find a downtrend
- Mark the lows that the price makes after each leg to the downside
- At the same time compare the price lows with the RSI indicator
- When you see the RSI making higher lows while the price making lower lows, you found your divergence
- Now you wait until a Three Outside Up appears at a price lower low, aligned with an RSI higher low.
- Go long when the price breaks the high of the last candle of the Three Outside Up
- Set your stop loss and take profit levels, and expect a move to the upside
Like this:
Strategy 5: Trading The Three Outside Up With Fibonacci
Another popular way of trading the Three Outside Up candlestick 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 Up 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 an uptrend
- Then you wait for a decline, they always happen at some point
- Pick your Fibonacci tool and draw the levels from the low to the high of the move
- When the price hits a Fibonacci level and prints a Three Outside Up, that’s what you are waiting for
- Go long when the price breaks the high of the last candle of the Three Outside Up
- Set your stop loss and take profit levels, and expect a move to the upside
Here’s an example:
Strategy 6: Trading The Three Outside Up 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 Up pattern with Pivot Points:
- Activate the Pivot Points indicator on your charts
- Check which Pivot Points are under the price, those will tend to work as a support
- Ideally, you want to see the price on an uptrend, although is not required
- Wait for a decline of the price to a Pivot Point level
- At that level, you want to see a Three Outside Up pattern appearing, meaning that the level is being rejected
- Go long when the price breaks the high of the last candle of the Three Outside Up
- Set your stop loss and take profit levels, and expect a move to the upside
It looks like this:
This is what you learned today
- The Three Outside Up is a three-candle pattern.
- To be valid, it must appear after a move to the downside.
- It’s a bullish reversal pattern, meaning that it signs a potential reversal to the upside.
- To increase the accuracy, you can trade the Three Outside Up using pullbacks, moving averages, and other trading indicators.
Now I want to hear from you.
Do you trade the Three Outside Up candlestick pattern?
Let me know in the comments below.
Learn More
- List of all candlestick patterns explained
