- Sentiment: Bearish
- No. of candles: 3
- Direction: Reversal
What Is The Three Outside Down Japanese Candlestick Pattern?
The Three Outside Down pattern is a bearish reversal pattern that typically forms after an uptrend.
The Japanese candlestick pattern consists of three candles.
The first candle is a long white (bullish) candle, followed by a long real body candle (bullish or bearish) that engulfs the first candle.
The third candle is a long black (bearish) candle that opens above the second candle’s high and closes below the first candle’s low, effectively engulfing the first two candles.
What Is The Psychology Behind The Three Outside Down Pattern?
The Three Outside Down pattern reflects a potential shift in market sentiment from bullish to bearish.
During the period of the first white candle, buyers are in control and push the price higher.
However, during the period of the second candle, the buying pressure wanes, and selling pressure may start to emerge, resulting in a long candle that engulfs the first candle.
During the period of the third black candle, sellers step in and completely overwhelm the buyers, pushing the price back down and erasing the gains made during the first two candles’ period.
This pattern indicates a possible loss of momentum for the bulls and hints at a potential trend reversal, as sellers attempt to regain control.
Japanese Candlestick Charting Techniques, Second Edition
46% OffHow To Trade The Three Outside Down Reversal Pattern?
To trade the Three Outside Down pattern, wait for confirmation by a subsequent bearish candle or another technical indicator.
The sell trigger occurs when the price moves and closes below the low of the third black candle, confirming the pattern.
Place a stop loss order above the high of the first white candle to protect against potential false breakouts or reversals.
As the price moves in your favor, consider using trailing stops or other risk management techniques to lock in profits and minimize potential losses.
Additional Tips
While the Three Outside Down pattern can be a reliable bearish reversal signal, it is essential to use it in conjunction with other technical indicators and chart patterns to confirm the trend change.
Additionally, be aware of the overall market context and consider factors such as support and resistance levels, as well as the strength of the prevailing trend.
Keep in mind that no single pattern can guarantee a trend reversal, and proper risk management is always necessary.
Continue to learn about Japanese candlesticks through books, such as Steve Nison’s “Japanese Candlestick Charting Techniques” and “Beyond Candlesticks.”