DEFINITION of 'Three Outside Up/Down'

The three outside up and three outside down are three-candle reversal patterns that appear on candlestick charts.

BREAKING DOWN 'Three Outside Up/Down'

The three outside up is a candlestick pattern, where:

  1. The market is in a downtrend;
  2. The first candle is black;
  3. The second candle is white with a long real body and fully contains the first candle;
  4. And, the third candle is white with a higher close than the second candle.

Similarly, the three outside down is a candlestick pattern, where:

  1. The market is in an uptrend;
  2. The first candle is white;
  3. The second candle is black with a long real body that fully contains the first candle;
  4. And, the third candle is black with a close lower than the second candle.

The first candle marks the beginning of the end for the prevailing trend as the second candle engulfs the first candle. The third candle marks an acceleration of the reversal as there’s a failure to surpass the second candle to maintain to the prior trend.

The three outside up and three outside down patterns occur relatively frequently and are reliable indicators of a reversal. Traders should use these indicators as a primary trading signal, but still watch for confirmations from other chart patterns or technical indicators.

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