Three Outside Up/down

What is a Three Outside Up or Three Outside Down?

Three outside up and three outside down are three-candle reversal patterns built on the engulfing pattern. The three outside up begins in a decline with a dark candle, followed by a white candle whose real body engulfs the first body entirely (the bullish engulfing), and completes with a third candle closing above the second candle's close. The three outside down mirrors it at the top of an advance: a white candle, a dark body engulfing it, and a third candle closing lower still.

The pattern formalizes the confirmation step. An engulfing candle is already a strong two-candle statement, one session fully reversing the prior session's body, but a meaningful fraction of engulfing signals stall or reverse immediately. Requiring a third candle to extend in the reversal direction filters out engulfings that had no follow-through, at the cost of entering one candle later. Like its sibling three inside up/down, this confirmation-inclusive naming is generally associated with Gregory Morris's candlestick pattern work.

Traders care because the structure is objective end to end: engulfing relationship, then a directional third close, then a defined invalidation at the pattern's far extreme. It is one of the more commonly implemented reversal patterns in scanners for exactly that reason. The honest limitation is arithmetic: an engulfing candle is by definition large, and the third candle extends further, so entries on completion routinely sit a long way from the logical stop.

How to identify three outside up/down

The engulfing relationship is the heart of the pattern; verify it on real bodies, not shadows.

1. 1Confirm trend context: a decline before a three outside up, an advance before a three outside down.
2. 2Check the engulfing: the second candle's real body must fully contain the first candle's real body, and be colored against the prior trend.
3. 3Require the third candle to close beyond the second candle's close in the reversal direction, confirming follow-through.
4. 4Prefer engulfings at meaningful locations, a support level, resistance level, or trend extreme, over mid-range instances.
5. 5Set invalidation beyond the pattern's opposite extreme: below the engulfing candle's low for three outside up, above its high for three outside down.

How traders use it

• As a confirmed reversal entry: enter on the third candle's close with the stop beyond the engulfing candle's extreme, accepting the wide stop as the price of confirmation.
• As a filter over raw engulfing signals: systems that generate too many engulfing entries often adopt the three outside completion rule to cut the count and remove the no-follow-through cases.
• As a structure-alignment signal: the pattern carries more weight when the third close also takes out a swing point or reclaims a level, turning a candle pattern into a structural event rather than an isolated shape.
• As a reward-to-risk decision point: because the completed pattern spans three candles of range, some traders use the signal for bias only and seek entry on a subsequent pullback toward the engulfing body rather than chasing the third close.

Three outside vs neighboring patterns