Three Outside Up/Down Candlestick Pattern

What the pattern is

The three outside up and down pattern is a reversal pattern. It is an engulfing pattern followed by a confirmation candle. A reversal pattern is a group of candles that suggests the current move may be losing strength and may turn.

• Three outside up appears after a decline. It is a Bullish Engulfing followed by a bullish candle that closes higher.
• Three outside down appears after a rise. It is a Bearish Engulfing followed by a bearish candle that closes lower.

The name comes from the engulfing candle, which sits "outside" the range of the candle before it. A related pattern is the Three Inside Up/Down, which starts with a harami instead of an engulfing.

Drawn example (no real prices)

Formation rules

Three outside up

1. The market is in a decline before the pattern.
2. The opening candle is bearish.
3. The next candle is bullish, and its body fully covers the body of the bearish candle.
4. The confirmation candle is bullish and closes above the close of the engulfing candle.

Three outside down

1. The market is in a rise before the pattern.
2. The opening candle is bullish.
3. The next candle is bearish, and its body fully covers the body of the bullish candle.
4. The confirmation candle is bearish and closes below the close of the engulfing candle.

Most traders judge engulfing by the bodies, not the wicks. In forex, candles often open at the previous close, so the engulfing candle may not open beyond the prior body. Many traders accept this as long as the body fully covers the prior body.

What it says about buyers and sellers

In three outside up, sellers control the opening candle. Buyers then push price back past the whole of that body. The confirmation candle shows buyers still active in the next period. This does not prove the decline has ended. It only shows that buyers took control for a short stretch.

Three outside down works the same way in reverse: buyers lose control, sellers push past the prior body, and the confirmation candle shows sellers continuing.

Where it matters: context

• Trend. A reversal pattern needs something to reverse. Inside a sideways range it carries little meaning.
• Level. Traders give more weight to the pattern at support, resistance, a prior swing high or low, or a round-number area. See Technical analysis and Chart Patterns.
• Timeframe. On higher timeframes each candle contains more trading, so the pattern reflects broader activity. On low timeframes it appears often and is easily caused by noise or a single news release.
• Size. An engulfing candle that is small compared with recent candles shows less than a large one.

Why it fails in isolation

• The confirmation comes late. By the time the confirmation candle closes, much of the move may already have happened. The distance to a logical stop level can be wide.
• Trend strength. In a strong trend, the market often pauses, prints the pattern and then continues in the original direction.
• News spikes. A data release can create a large candle that looks like engulfing but reflects one event, not a lasting shift.
• Spread and gaps. Wide spreads around rollover or thin hours can distort candle shapes on short timeframes.

How traders seek extra confirmation

• They check whether the pattern formed at a clear level rather than in the middle of a range.
• They look at a higher timeframe to see whether the broader direction supports the idea.
• They wait to see whether price holds beyond the engulfing candle instead of slipping back inside it.
• They use momentum or volume tools as a second view, knowing that indicators can also lag or mislead.
• They decide in advance where the idea is wrong. Many place the invalidation level beyond the extreme of the pattern.

None of this makes the pattern reliable on its own. Leveraged forex and CFD trading can lose money fast, so position size and stop placement matter more than any candle shape. See Risk management and the full list of Candlestick Patterns.

Frequent questions

Is three outside up the same as a bullish engulfing?

No. It contains a bullish engulfing, then adds a bullish confirmation candle that closes higher.

Does the confirmation candle have to be large?

There is no fixed rule. It must close beyond the close of the engulfing candle. A small confirmation shows less follow-through.

How is it different from an outside bar?

An Outside Bar usually compares the full high-low range, including wicks. The three outside candlestick pattern focuses on bodies and adds a confirmation candle.

Can I use this pattern on its own?

It fails often when used alone. Traders combine it with trend, levels, higher timeframes and a planned exit, and it still offers no certainty.