How to recognize the Three Inside Down Candlestick Pattern? Discover this bearish candlestick pattern

Did you know that the Three Inside Down Candlestick Pattern tells you that the market is bearish? Or that its opposite, the Three Inside Up is a bullish candlestick pattern? Learn all about them, in our latest video

Three Inside Down Candlestick Pattern – criterias that need to be met

Hello, traders! So we continue with our coverage of Candlestick patterns that can be used as strategies in your daily trading. Today, we are going to go over a pattern that is called, “Three Inside Up or Down” pattern, which is, as the name itself says, it’s a three-candle reversed pattern, that appears in the charts. It’s not an easy pattern to find in the charts since it’s a three-candle pattern, and you need a lot of things to coincide, in order to identify this pattern and use it in your trading. More or less, it is a reversal pattern and as the name itself says, it’s up or down, depending on the trend. So, the Three Inside Up is actually a bullish reversal pattern, while the Three Inside Down, of course, is a bearish reversal pattern and let’s start with the Three Inside Down.

So, the first step, in this pattern, is that the market has to be in an uptrend like we have here on the Dollar/Canadian one-hour chart. So we have created a clear uptrend almost vertically, we went higher, and after we have identified the uptrend that we are looking for, the second condition is that we need a big, healthy, long candle. In this particular case, we are talking about a green candle in the chart, which is this candle here. The second candle next to the green candle should be a bearish candle and the body of the candle… So, pay attention, we are not talking to the whole candle, including the shadow, but we only care about the body. The body of the candle should be within the bullish candle. So, the body of the bullish candle should follow this bearish candle next to each other. And the third candle is another bearish candle that closes below the close of this first low of this first candle. So, in other words, we have a reversal. So, after this green candle is formed within the breakout is happening, but then, actually, what happens is that we have a one, two punch and first the red candle appears and then the second bigger, the final blow appears and we have, usually, a reversal, like we have here, not a straight one since we corrected higher again, we did not create a new high, which is extremely important, and then there was a huge move to the downside created here.

So, in the same chart, you can see clearly, more examples. So, again a big long healthy green candle. Another red candle that’s within the body of the first candle and then another candle that closes below, and this time it initiates an immediate retracement. In the third part of the chart, the same, again, move higher, we have a small body within the green bullish body, and then, we have a huge move to the downside, big huge red candle. And then, the price pushes lower. So, again, the key is that we are talking about the body of the candle. The perfect Three Inside Down pattern will be in the case where the second candle actually gaps down, and it shows up somewhere here, somewhere in the middle of the first candle, but this is almost impossible to find since, as I said earlier, very rarely you see a bigger gap in Forex. And especially in this condition because you will need the gap, and you will need the previous candle to be a long green candle, and then we are in an uptrend. So, there are too many conditions to meet.

So, on the other side, this is a Dollar/Yen chart. This is just the upside down version of the same pattern, so it’s a bullish reversal pattern, Three Inside Up. And, again, the market should be in a downtrend. The first candle, like we have here, is a long red candle. The second candle, the body is within the first one, and then we have the third one, actually, or the second bullish candle is a second punch, and it closes above this close of the second candle, and above the open of the first candle, and then we have a full reversal and this is a very, very good sign that market is going to reverse. In terms of directly trading this pattern. It is possible, however, you will need to enter as soon as the third candle is formed, and then the question is whether that fits your trading plan since you will have to put your Stop-Loss below the previous low. And, for example, in this case, since it’s a one-hour chart, you will be risking around 30-35 pips and then you look for where is the best place to exit your positive trade. However, how I use this pattern is, whenever I identify it, I see it as a very reliable sign that market is reversing and that I should start, in this case, in this Dollar/Yen case, I should start looking to buy dips.