The three candlestick patterns that are outside up/down are all variations of the candle reversal patterns you see on charts. These are used to indicate the trend's reversal. One candlestick is white or black and is followed immediately by two candlessticks of the opposite color. These two variations of the outside patterns are intended to exploit the market's psychology in order to read near-term changes of trader sentiment. This is a visual representation for the three outside up patterns.
1. The market must be in a downtrend for a three-outside up pattern to occur.
2. The pattern's first candle will be black and signify a downtrend.
3. The next candle will be a long, white candle. It will be sufficiently long to fully contain the first candle in black.
4. A white candle will be used for the third and final candle that indicates three outside up. This candle should be closer than the second. This means that the downward trend is in reverse.
The three outside down and three outward candlestick patterns are both common and reliable indicators of a trend reversal. These indicators are used by traders as buying and selling signals. These signals are used in conjunction with other indicators, meaning that they wait for confirmation before they buy or sell their positions. One can see that the bearish trend continues with the three candles outside of the up candlestick pattern.
The close of the first candle is lower than the open, which means that there is a short-selling interest. This increases market confidence in bearish movements. Although the second candle will open lower that the first, its long real body will make it appear to be in the opposite direction. Bull power is demonstrated when the candle crosses the opening tick for the first black candle. This is a warning sign for bears that they may be looking to increase their profits and tighten their stops in anticipation of a market reversal.
The third candle is a confirmation that the trend may be reversing. The reason for this is that the price of security continues to rise, well beyond the limits of the first candle. The bullish candlestick is completed by the third candle. This is called an 'outside day'. The asset closed at a new high, which indicates that bullish confidence is increasing.
- The strength of this indicator is determined by how large the engulfing candlestick is, which is the second of three. The three outside up patterns are more important if the second candle is larger than the others. The signal of a small bearish downtrend will weaken the more it is engulfed. As the second candle is lit, bullish sentiments appear to prevail over bearish.
The three outside up/down patterns are similar to the inside up/down. However, they do not mean that the market is heading in a certain direction. You need to look beyond this indicator for a longer term market movement. When it comes to setting stoploss or booking profits, it is a smart idea to combine this indicator with other indicators.
MACD, RSI and Volume are some of the indicators that can be combined with the three indicators from the outside up. This confirms the pattern, and one can quickly spot a trend change and figure out their buy signal. If one observes an increase in volume during the bullish reversal's second and third days, this could strengthen the reliability of the three up candlestick patterns. A price gap on the next day is another sign that the trend may reverse.