You’ve been staring at charts for hours.
Your trades keep going wrong.
You see these weird three-candle formations but have no clue what they mean.
Sound familiar?
I get it.
When I first started trading, I’d spot these patterns everywhere but couldn’t make sense of them.
The three outside down candlestick pattern was one that kept showing up right before my winning trades turned into losers.
Here’s what I wish someone had told me back then.
What Is The Three Outside Down Pattern?
The three outside down pattern is like a red flag waving at a bull market.
It’s a bearish reversal pattern.
Shows up when an uptrend is about to flip.
Think of it as the market’s way of saying “party’s over, time to go home.”
This pattern has three candles.
Each one tells part of the story.
And when you see all three together, you know something big is about to happen.
Understanding The Three Outside Down Candlestick Formation
Let me break this down candle by candle.
First Candle:
- Small bullish (green) candle
- Shows the uptrend is still alive
- But it’s weak
- Like a tired runner near the finish line
Second Candle:
- Big bearish (red) candle
- Completely engulfs the first candle
- Opens above the first candle’s high
- Closes below the first candle’s low
- This is where the bears take control
Third Candle:
- Another bearish candle
- Closes lower than the second candle
- Confirms the reversal
- Seals the deal
The pattern looks like this: small green, big red, smaller red.
Think of it as a three-act drama where the bulls get crushed.
How To Identify Three Outside Down Patterns On Charts
Spotting this pattern is easier than you think.
Here’s my simple checklist:
Step 1: Look for an uptrend
- Price has been going up
- Recent highs keep getting higher
- Bulls have been in control
Step 2: Find the small green candle
- Should be relatively small
- Doesn’t matter if it has wicks
- Just needs to be bullish
Step 3: Spot the engulfing red candle
- Must completely cover the first candle
- Opens higher, closes lower
- Should be significantly bigger
Step 4: Confirm with the third candle
- Must be bearish
- Should close lower than candle two
- Can be any size
I use this pattern on multiple timeframes.
Works on 15-minute charts.
Works on daily charts.
The key is context.
The Psychology Behind Three Outside Down Reversal
Here’s what’s really happening in the market’s mind.
Day 1: Bulls are still confident but running out of steam.
They push price higher but barely.
It’s like that last push-up when your arms are already shaking.
Day 2: Bears smell blood.
They attack hard.
Bulls try to fight back at the open.
But bears overwhelm them completely.
Price crashes through support.
Bulls start panicking.
Day 3: Reality sets in.
Bulls give up.
Bears keep pushing.
The trend has officially flipped.
This isn’t just lines on a chart.
It’s human emotion playing out in real time.
Fear replacing greed.
Panic replacing confidence.
Three Outside Down vs Other Bearish Patterns
People always ask me how this compares to other patterns.
Three Outside Down vs Evening Star:
- Evening star has a small middle candle
- Three outside down has a big engulfing candle
- Both are bearish but three outside down is more aggressive
Three Outside Down vs Bearish Engulfing:
- Bearish engulfing is just two candles
- Three outside down adds confirmation
- More reliable but less frequent
Three Outside Down vs Dark Cloud Cover:
- Dark cloud only penetrates halfway
- Three outside down completely engulfs
- Three outside down is stronger signal
The three outside down pattern is like the heavy artillery of bearish reversals.
When you see it, pay attention.
Trading Strategy For Three Outside Down Pattern
Here’s how I actually trade this pattern.
No theory.
Just what works.
Entry Strategy:
Wait for the third candle to close.
Enter short at the close of candle three.
Or wait for a small pullback and enter on the retest.
I prefer the pullback entry.
Gives better risk-reward.
Stop Loss Placement:
Put your stop above the high of candle two.
That’s your line in the sand.
If price goes back above that level, the pattern failed.
Cut your losses and move on.
Profit Targets:
I use multiple targets:
- Target 1: Previous support level
- Target 2: 1.5x your risk
- Target 3: Next major support zone
Take partial profits at each level.
Let some position ride for the big move.
Risk Management With Three Outside Down Patterns
This is where most traders mess up.
They see the pattern and go all in.
Big mistake.
Here’s my risk management framework:
Position Sizing:
- Never risk more than 2% per trade
- If you’re new, start with 1%
- Size down if market is choppy
Market Context:
- Don’t trade against major trends
- Check higher timeframes first
- Avoid trading during major news events
Pattern Quality:
- Skip patterns in low-volume areas
- Look for clean formations
- Avoid patterns with huge wicks
Remember, even the best patterns fail sometimes.
Risk management keeps you alive for the next trade.
Best Timeframes For Three Outside Down Trading
I’ve tested this pattern on every timeframe.
Here’s what works best:
Daily Charts:
- Most reliable
- Less noise
- Perfect for swing trading
- My personal favorite
4-Hour Charts:
- Good middle ground
- Works for day trading
- Still reliable enough
1-Hour Charts:
- More frequent signals
- Higher failure rate
- Need tight risk management
15-Minute Charts:
- Lots of false signals
- Only for experienced traders
- High stress, low reward
I stick to daily and 4-hour charts.
Less stress, better results.
Common Mistakes When Trading Three Outside Down Patterns
I’ve made every mistake in the book.
Here are the big ones:
Mistake 1: Trading incomplete patterns
- Jumping in after just two candles
- Pattern needs all three to be valid
- Patience pays off
Mistake 2: Ignoring volume
- High volume makes patterns stronger
- Low volume means weak conviction
- Always check volume confirmation
Mistake 3: Wrong market context
- Trading against major uptrends
- Ignoring support/resistance levels
- Not checking the bigger picture
Mistake 4: Poor risk management
- Risking too much per trade
- Stops too tight or too wide
- No profit-taking plan
Mistake 5: Overtrading
- Taking every pattern you see
- Quality over quantity
- Wait for the best setups
Learn from my mistakes.
Don’t repeat them.
Volume Confirmation and Additional Indicators
Volume is your best friend with this pattern.
Here’s what to look for:
Ideal Volume Pattern:
- Candle 1: Normal volume
- Candle 2: High volume (selling pressure)
- Candle 3: Increasing volume (confirmation)
Red Flags:
- Low volume on candle two
- Decreasing volume on candle three
- Volume doesn’t match price action
Additional Indicators I Use:
RSI:
- Look for overbought readings (above 70)
- Confirms reversal potential
- Don’t rely on it alone
MACD:
- Bearish divergence adds strength
- Wait for signal line cross
- Confirms momentum shift
Moving Averages:
- Pattern near key resistance
- 50-day or 200-day averages
- Dynamic resistance levels
Combine these for higher probability trades.
But remember, the pattern itself is the star.
Everything else is supporting cast.
Real Market Examples and Case Studies
Let me share some real trades I’ve taken.
Example 1: NIFTY 50 – March 2024
Market was in a strong uptrend.
Hit new highs daily.
Everyone was bullish.
Then I spotted a three outside down pattern.
Small green candle on day one.
Massive red engulfing candle on day two.
Another red candle on day three.
Volume was through the roof.
I entered short at the close.
Market dropped 8% over the next two weeks.
Example 2: Bank Nifty – Failed Pattern
Saw the pattern forming.
Looked perfect on paper.
But volume was weak.
Market was near major support.
I skipped the trade.
Good thing too.
Price bounced hard the next day.
Not every pattern works.
That’s why we manage risk.
Example 3: Individual Stock
Small-cap stock in a bubble.
Everyone was buying.
Three outside down appeared.
Perfect volume confirmation.
Entered with tight stops.
Stock crashed 40% in three days.
Sometimes the market gives you gifts.
Take them when they come.
Combining Three Outside Down With Support and Resistance
This is where the magic happens.
Pattern + levels = higher probability.
Best Locations:
- Major resistance zones
- Previous highs
- Round number levels (like 50,000 on Nifty)
- Fibonacci retracement levels
How I Use It:
First, I mark my key levels.
Then I wait for the pattern to form near these levels.
When both align, I pay attention.
That’s when the big moves happen.
Example Setup:
- NIFTY hits 18,000 (major round number)
- Three outside down forms
- Volume confirms
- Enter short with stop at 18,100
This combination has made me more money than any other setup.
Master this and you’ll see the difference.
Market Conditions That Favor This Pattern
Not all market conditions are created equal.
Here’s when this pattern works best:
Trending Markets:
- Clear uptrend in place
- Pattern signals reversal
- Big moves follow
Overbought Conditions:
- Market has rallied too far too fast
- Everyone is bullish
- Pattern confirms exhaustion
High Volatility:
- Emotions are running high
- Big candles form easily
- Moves are more dramatic
Poor Conditions:
- Sideways choppy markets
- Low volume periods
- Major support nearby
I avoid trading this pattern in poor conditions.
Patience saves money.
Wait for the right setup.
Advanced Three Outside Down Trading Techniques
Once you master the basics, try these advanced techniques.
Multi-Timeframe Analysis:
- Spot pattern on daily
- Confirm on 4-hour
- Enter on 1-hour pullback
Pattern Clustering:
- Multiple patterns in same area
- Increases probability
- Bigger potential moves
Sector Rotation:
- Pattern in leading stocks
- Signals sector weakness
- Trade sector ETFs
Options Strategies:
- Buy puts when pattern forms
- Sell calls for income
- Use spreads for defined risk
These techniques take time to master.
Start simple.
Add complexity slowly.
Building Your Three Outside Down Trading Plan
You need a plan.
No plan equals no profits.
Here’s my framework:
Pre-Market Preparation:
- Scan for potential setups
- Mark key levels
- Check economic calendar
During Market Hours:
- Monitor developing patterns
- Wait for completion
- Execute when conditions align
Post-Market Review:
- Analyze winners and losers
- Update trading journal
- Plan for next day
Monthly Review:
- Calculate win rate
- Assess profit/loss
- Adjust strategy if needed
Consistency beats perfection.
Stick to your plan.
Psychology of Trading Three Outside Down Patterns
Trading is 80% psychology.
The pattern is just 20%.
Here’s the mental game:
When Pattern Forms:
- FOMO kicks in
- Want to enter immediately
- Fight the urge
After Entry:
- Doubt creeps in
- Second-guess the trade
- Stick to your plan
During Drawdown:
- Panic sets in
- Want to exit early
- Trust your stop loss
When Winning:
- Greed takes over
- Want to hold forever
- Take profits systematically
I keep a trading journal.
Write down my emotions.
Helps me spot patterns in my behavior.
Trade the plan, not the emotion.
Frequently Asked Questions (FAQs)
Q: How reliable is the three outside down pattern?
In trending markets with good volume, I see about 65-70% success rate.
Not perfect, but profitable with proper risk management.
Key is trading only the best setups.
Q: Can this pattern work in all markets?
I’ve used it in stocks, indices, forex, and crypto.
Works in any market with candlestick charts.
Just adjust position sizes for volatility.
Q: What if the pattern forms but volume is low?
Skip it.
Low volume patterns have higher failure rates.
Wait for better setups.
Q: How long does the reversal typically last?
Depends on the timeframe and market context.
On daily charts, moves can last weeks.
On hourly charts, maybe a few days.
No fixed rule here.
Q: Should I always wait for the third candle to close?
Yes, unless you’re very experienced.
Incomplete patterns fail more often.
Patience is profitable.
Q: What’s the best stop loss strategy?
I put stops above the second candle’s high.
Gives the trade room to breathe.
Keeps risk manageable.
Q: Can I use this pattern for buying puts?
Absolutely.
Options can amplify the profits.
Just manage the time decay risk.
Q: How do I scan for these patterns?
Most trading platforms have pattern scanners.
TradingView has good screening tools.
Or you can spot them manually.
Q: What if the pattern appears at major support?
I’d skip the trade.
Support can cause bounces.
Look for patterns at resistance instead.
Q: How important is the size of each candle?
Second candle should be significantly larger.
First and third can vary.
Focus on the engulfing action.
Wrapping Up Your Three Outside Down Journey
The three outside down candlestick pattern isn’t magic.
It’s just probability.
When market conditions align with this formation, bears tend to take control.
But here’s the thing.
Patterns don’t make money.
Traders do.
Your job is to find high-probability setups.
Manage risk properly.
Stay disciplined.
And let the probabilities work in your favor.
I’ve shared everything I know about this pattern.
The rest is up to you.
Start small.
Practice on paper first.
Build confidence slowly.
And remember, every expert was once a beginner.
The three outside down pattern could be your edge in this market.
Use it wisely.
