What Are Three Outside Up and Three Outside Down?

Three Outside Up and Three Outside Down are three-candle reversal patterns that often appear at the end of a trend. They help beginners spot a potential market turn. Three Outside Up suggests a possible bottom, while Three Outside Down warns that a top may be forming.

Identifying the Patterns

Three Outside Up (Bullish)

Candle 1: A long bearish candle with a large body, showing sellers are in control.

Candle 2: A bullish candle whose body completely engulfs the body of Candle 1 — this forms a bullish engulfing pattern.

Candle 3: Another bullish candle that closes above the close of Candle 2.

The first two candles look exactly like a bullish engulfing pattern. But to become a Three Outside Up, a third bullish candle is required for confirmation.

Three Outside Down (Bearish)

Candle 1: A long bullish candle with a large body, showing buyers are in control.

Candle 2: A bearish candle whose body completely engulfs the body of Candle 1 — this is a bearish engulfing pattern.

Candle 3: Another bearish candle that closes below the close of Candle 2.

How to Trade It

Wait for the third candle to CLOSE before taking action.

Enter a BUY trade when Three Outside Up appears at a support area, or enter a SELL trade when Three Outside Down appears at a resistance area.

Place a stop-loss below the low of Candle 1 for a buy trade, and above the high of Candle 1 for a sell trade.

Aim for a minimum risk:reward of 1:2 or take profit at the nearest support/resistance level.

Real Example

Imagine EUR/USD is falling and reaches a support level. A long bearish candle appears, followed by a bullish candle that engulfs its body, then another bullish candle closes higher. That is a Three Outside Up signal. Entering after Candle 3 with a stop below the first candle's low gives a high-probability long setup.

Common Mistakes

Confusing the Three Outside pattern with a two-candle engulfing pattern.

Entering immediately after the second candle closes without waiting for the third candle to confirm.

Ignoring the market context: the pattern works best at the end of a trend or near key support/resistance zones.

Placing the stop-loss too tight, which can lead to being stopped out before the price moves in your direction.

Content is for reference only, not investment advice. Forex trading carries high risk.

Three Outside Up/Down: A Powerful Reversal Signal