Three Outside Up and Three Outside Down: Engulfing with Confirmation
Three Outside Up and Three Outside Down are three-candle patterns built on the Engulfing pattern. A bullish or bearish Engulfing is followed by a third candle that confirms the reversal direction. The added confirmation makes these among the most reliable candlestick reversal patterns available.
The Engulfing pattern is already a powerful two-candle reversal. But some traders hesitate to act on it immediately, fearing a false reversal. Three Outside Up and Three Outside Down answer that hesitation: they add a third candle that follows through in the reversal direction, confirming that the Engulfing was not a one-day anomaly but the beginning of a genuine trend change.
Three Outside Up (left): Engulfing + confirmation. Three Outside Down (right): Bearish Engulfing + confirmation. The Engulfing is candle 2.
Three Outside Up: Construction
- Candle 1: A bearish candle, usually small to medium sized, in the context of a downtrend.
- Candle 2: A bullish Engulfing candle — opens below candle 1's close and closes above candle 1's open. The prior session's entire move is reversed.
- Candle 3: Another bullish candle that closes above candle 2's close, adding further evidence of buying conviction.
Three Outside Down: Construction
- Candle 1: A bullish candle in the context of an uptrend.
- Candle 2: A bearish Engulfing candle — opens above candle 1's close and closes below candle 1's open.
- Candle 3: Another bearish candle that closes below candle 2's close.
Three Outside vs Three Inside: Key Difference
| Feature | Three Inside Up/Down | Three Outside Up/Down |
|---|---|---|
| Base two-candle pattern | Harami (second body inside first) | Engulfing (second body outside first) |
| Second candle | Small — contained within first | Large — exceeds first body on both sides |
| Signal strength | Moderate — Harami is tentative | Stronger — Engulfing is decisive |
| Frequency | More common | Less common |
| Third candle role | Confirms the Harami's hint | Confirms the Engulfing's decision |
Three Outside Down at Resistance
After a rally, an index reaches a long-term resistance zone. Day 1: small green candle, range ₹600–₹612. Day 2: bearish Engulfing, opens at ₹614, closes at ₹598 — engulfs Day 1 entirely. Day 3: continues lower, closes at ₹588. Three Outside Down confirmed. Short entry on Day 3 close: ₹588. Stop: above Day 2 high (₹615). Target: ₹570 (prior support). Clean risk/reward with a three-candle confirmation of the reversal.
Wait for the Full Candle 3 Close
The biggest mistake with Three Outside patterns is entering mid-way through candle 3, before it has closed. An intraday high on candle 3 does not confirm the pattern — it must close above candle 2's close (Three Outside Up) or below candle 2's close (Three Outside Down). Enter only after the third candle's session is complete.
Key Takeaways
- Three Outside Up: bearish candle → bullish Engulfing → confirmation bullish candle closing above the Engulfing.
- Three Outside Down: bullish candle → bearish Engulfing → confirmation bearish candle closing below the Engulfing.
- These are the 'confirmed Engulfing' equivalent of Three Inside Up/Down being the 'confirmed Harami.'
- The third candle provides strong confirmation that the momentum shift is sustained, not a one-day spike.
- Because the Engulfing is a stronger base signal than a Harami, Three Outside patterns are generally more powerful than Three Inside.