Three Outside Up Candlesticks Pattern

Have you ever looked at a stock market chart and seen candles going up and down? These are called candlestick patterns, and they help traders understand what might happen next in the market.

One of the most powerful patterns is called the Three Outside Up Candlestick Pattern. This pattern gives us a hint that the price may stop going down and start going up.

In this blog, we’ll learn:

• What the Three Outside Up pattern means
• How to spot it on a chart
• Why it’s important for traders
• And how you can use it to make better trading decisions

Don’t worry if you’re new to trading or just starting to learn. We’ll explain everything in simple words and clear examples so that you can easily understand how this pattern works.

Let’s begin!

🟢 Three Outside Up Candlestick Pattern

The Three Outside Up pattern is a special sign on a stock chart. It shows that the price of a stock is likely to go up after a period of going down. Traders use this pattern to decide when it might be a good time to buy a stock.

Let’s break it down:

• “Three” means there are three candles in this pattern.
• The first candle is a red (bearish) candle, showing that the price was going down.
• The second candle is a green (bullish) candle, which is bigger and covers the red one. This means the price starts going back up.
• The third candle is another green candle, showing that the price keeps going up.

When these three candles show up together in the right place, it tells traders that the stock might be changing from a downtrend to an uptrend. This is why it’s called a “bullish” pattern – because it often means the price is going to rise, like a bull charging ahead.

🟢 Structure & Formation

Now, let’s take a closer look at how the Three Outside Up pattern is formed. Remember, it’s made up of three candles that show us how the price is changing.

Candle 1: Red (Bearish) Candle

• The first candle is red. This means the stock price was going down during that time. Traders are selling, and the price drops.

Candle 2: Green (Bullish) Candle

• The second candle is green and larger than the first one. It “covers” or engulfs the red candle. This means the price goes up and is stronger than the previous drop. People are now buying, which pushes the price higher.

Candle 3: Another Green Candle

• The third candle is also green. This shows that the price is still going up. Traders are continuing to buy, and the stock keeps moving higher.

In short, the Three Outside Up pattern shows that after a downtrend, there’s a strong chance the price will go up. It’s a bullish signal, and traders use it to spot good times to buy stocks.

🟢 What Does the Pattern Indicate?

The Three Outside Up pattern is like a signal telling us that the price of a stock may start going up after being down for a while. It shows a change in the market from selling (people pushing the price down) to buying (people pushing the price up).

Here’s what the pattern indicates:

• Bullish Sentiment: This means that people are feeling positive about the stock. They believe the price will go higher, so they start buying it.
• Market Reversal: It shows that the market is changing direction. After a time of falling prices (a downtrend), this pattern suggests that the prices might start going up (an uptrend).
• Increased Buying Power: The second green candle that is larger than the first red one shows that buyers are in control. This tells traders that the price is likely to keep rising.

Volume Matters

• The strength of this pattern is often stronger if there’s higher trading volume. This means a lot of people are trading, which makes the price change more powerful.

🟢 How to Trade Using the Three Outside Up Pattern

Now that you know what the Three Outside Up pattern is, let’s talk about how you can use it to make smart trades.

Step-by-Step Guide to Trading the Three Outside Up Pattern:

1. Look for the Pattern
   First, you need to spot the Three Outside Up pattern on a chart. Remember, there are three candles:
   • A red (bearish) candle first.
   • A green (bullish) candle that is larger and covers the red candle.
   • Another green candle to show the price is still going up.
2. Check for Confirmation
   Don’t just trust the pattern alone! It’s good to double-check if the price is actually going up. You can look for other signs like:
   • Volume: More buyers should be trading. Higher volume = stronger signal.
   • Other Indicators: You can use tools like RSI (Relative Strength Index) or MACD to confirm the pattern. These tools tell you if the stock is ready to go up.
3. Enter the Trade
   Once the pattern is formed and you’ve checked that everything looks good, it might be time to buy the stock.
   • You can enter the trade after the third green candle closes.
   • Set a Stop-Loss: To protect yourself in case the price goes down instead of up, you can set a stop-loss below the lowest point of the pattern.
4. Exit the Trade
   When the price is moving up and you see your profits, you can decide when to sell. Many traders will exit when the price has risen by a certain amount or if other signals show the price is about to go down again.

Trading Tips:

• Timeframes: This pattern works well on longer timeframes like daily or weekly charts, but it can also be spotted on hourly charts for faster trades.
• Don’t Rely on One Pattern: It’s always a good idea to use other patterns or tools along with the Three Outside Up to make sure you’re making a good decision.

🟢 Difference Between Three Inside Up and Three Outside Up

Both the Three Inside Up and Three Outside Up patterns are bullish reversal patterns, but they look a little different and can tell us different things about the market. Let’s compare them so you can spot them easily.

Three Inside Up Pattern:

• First Candle: A red (bearish) candle, showing the price is going down.
• Second Candle: A green (bullish) candle, inside the body of the red candle. It doesn’t go above or below the red candle.
• Third Candle: Another green (bullish) candle, showing that the price is still rising.

The Three Inside Up pattern tells us that after a drop in the price, the stock might go up. But, the second candle is smaller and inside the first red candle.

Three Outside Up Pattern:

• First Candle: A red (bearish) candle, showing the price is going down.
• Second Candle: A larger green (bullish) candle that engulfs the red candle.
• Third Candle: Another green (bullish) candle, showing the price is still going up.

The Three Outside Up pattern is stronger because the second candle engulfs the red candle, which shows a bigger shift in the market from down to up.

Quick Comparison:

Feature	Three Inside Up	Three Outside Up
Size of second candle	Smaller, inside the red candle	Larger, engulfs the red candle
Strength	Weaker signal	Stronger signal
Trend Reversal	Can signal a small change	Signals a stronger trend reversal

🟢 Real Chart Examples

Now, let’s look at real-life examples to see how the Three Outside Up pattern works on actual stock charts. This will help you understand how to spot it when you’re trading.

Daily Chart

Imagine you’re looking at a daily chart for Stock XYZ. Here’s how you would spot the Three Outside Up pattern:

• Candle 1 (Red Bearish Candle): Stock XYZ has been falling, and the first candle is red, showing the price is going down.
• Candle 2 (Green Bullish Candle): The second candle is green and much larger than the first one, covering the entire red candle. This shows the price is going back up.
• Candle 3 (Green Bullish Candle): The third candle is also green, confirming that the price is still going higher.

When you see these three candles, you know the stock is likely reversing from a downtrend to an uptrend, and it might be a good time to buy.

Hourly Chart

Let’s look at an hourly chart for Stock ABC. In this example:

• Candle 1: The price has been falling, and you see a red candle.
• Candle 2: The second candle is green and much bigger than the red one.
• Candle 3: Another green candle shows the price is continuing to rise.

This pattern is the same as before, but since it’s on an hourly chart, the pattern happens faster, and you can make quicker decisions for shorter-term trades.

🟢 Common Mistakes to Avoid

While the Three Outside Up pattern is a powerful tool for traders, it’s easy to make mistakes if you’re not careful. Here are some common mistakes to watch out for when using this pattern:

1. Ignoring Volume

• What happens: Sometimes, traders get excited when they see the Three Outside Up pattern and buy too quickly. But if the pattern appears with low trading volume, it might not be as strong.
• What to do: Always check if there’s higher volume along with the pattern. More buyers trading means the pattern is more likely to be correct.

2. Relying on the Pattern Alone

• What happens: Some traders only look at the Three Outside Up pattern and don’t use other tools to confirm it. This can lead to bad trades.
• What to do: Combine the pattern with other technical tools, like the RSI (Relative Strength Index) or MACD (Moving Average Convergence Divergence), to confirm that the stock is likely to go up.

3. Not Setting a Stop-Loss

• What happens: Sometimes, traders forget to set a stop-loss, which is a safety measure if the price goes in the opposite direction.
• What to do: Always set a stop-loss below the lowest point of the Three Outside Up pattern. This helps protect your money if the market doesn’t go the way you expect.

4. Forgetting to Check the Bigger Trend

• What happens: The Three Outside Up pattern might appear, but if the overall market trend is still down, the pattern might not work as well.
• What to do: Always check the bigger trend of the stock or market. If the market is in a strong downtrend, the pattern might not be as reliable.

5. Misreading the Candles

• What happens: Sometimes, traders mistake other patterns for the Three Outside Up pattern. For example, they might think it’s the Three Outside Up pattern when it’s really something else.
• What to do: Make sure you’re looking at the pattern correctly. The second candle should engulf the first red candle, and the third candle should still be green and confirming the rise.

In Short:

To use the Three Outside Up pattern effectively, avoid these common mistakes. Always double-check the volume, combine the pattern with other tools, set a stop-loss, and make sure you’re reading the candles correctly.

🟢 Tips for Beginners

If you’re new to trading and using candlestick patterns like the Three Outside Up, here are some tips to help you get started safely and confidently.

1. Start with a Demo Account

• Why it’s important: Before you risk real money, use a demo account to practice. Most trading platforms offer demo accounts where you can make trades using fake money. This way, you can get comfortable with reading charts and spotting patterns without any risk.
• Tip: Practice identifying the Three Outside Up pattern on demo charts before trying it with real money.

2. Learn Other Candlestick Patterns

• Why it’s important: The Three Outside Up is just one of many candlestick patterns. The more patterns you learn, the better you’ll be at understanding the market and making good decisions.
• Tip: Learn patterns like the Hammer, Engulfing, and Doji to build your knowledge and improve your trading.

3. Use Stop-Loss and Take-Profit Orders

• Why it’s important: Trading without stop-loss (to limit losses) and take-profit (to lock in gains) orders is risky. They help you protect your money, especially in case the market moves in the wrong direction.
• Tip: Set your stop-loss just below the lowest point of the Three Outside Up pattern to protect yourself if things go wrong.

4. Don’t Rush

• Why it’s important: Patience is key when trading. It’s tempting to jump in right away when you see a good pattern, but rushing can lead to mistakes.
• Tip: Wait for the perfect setup. Make sure the pattern is clear, and other indicators are confirming it before making your trade.

5. Keep Learning

• Why it’s important: The more you learn about trading and candlestick patterns, the better you’ll become. Don’t stop at just one pattern.
• Tip: Read books, watch videos, and follow experienced traders to improve your skills.

Final Thoughts:

The Three Outside Up candlestick pattern is a powerful tool to help you spot when a stock’s price might go up after falling. By practicing, using other indicators, and staying patient, you can improve your trading skills and make smarter decisions.

Good luck with your trading, and always remember: practice makes perfect!