What it looks like
Candle one is an up candle after a rise. Candle two is a down candle whose body swallows candle one's whole body (the bearish engulfing). Candle three is another down candle that closes below candle two. The pattern's high is the highest point of the first two candles.
What it means
The engulfing showed sellers overpowering the last up candle. The third candle shows they kept going. Buyers had been in control and this is where they were stopped. It is a sign the rise is tiring, not proof that it has turned.
How to trade it
- 1
Look for it after a rise, ideally at a ceiling or a level that already mattered.
- 2
Wait for the next candle to close below the pattern's low, then sell.
- 3
Example: on the US30 1 hour chart three outside down spans 130 points; the sell is the next close below its low.
- 4
Stop just above the pattern's high, about 130 to 135 points in that example.
- 5
Target the nearest swing low or 2 times the stop.
A close above the pattern's high.
Where it works best
After a clear rise into a ceiling such as a previous day high, on 15 minute and higher charts.
WickSpeak finds three outside down automatically on any chart and names it on the candles that made it. Next to the name it writes what the pattern is, how to trade it and what proves it wrong, in plain English. In Playbook you can use three outside down, or any of the 146 patterns, as a condition alongside up to 12 conditions on any of 12 timeframes, then backtest it on past candles with your own costs.
Common mistakes
- Selling after a long run of down candles, when the move is already stretched.
- Placing the stop above the third candle instead of the pattern's high.
- Trading it with no rise behind it.
Related patterns
Questions traders ask
Is three outside down bearish?
Yes. It is a bearish engulfing followed by a lower close, and it warns the rise is tiring.
What proves three outside down wrong?
A close above the pattern's high.
What is the difference between three outside down and a bearish engulfing?
Three outside down adds a third down candle that closes lower, so it shows sellers following through.
Where does three outside down work best?
At a ceiling after a clear rise, on 15 minute and higher charts. In the middle of a range it means little.