Three Outside Up Candlestick Pattern

The three outside up bullish reversal Japanese candlestick pattern loses $14.50 in the forex market and makes $78.00 and $16.40 in the crypto and stock markets, respectively, on average per $100 risked.

But is there a better way to trade this pattern?

You can bet your candlestick charts there is. 

Keep reading if you want to know how to slice through this pattern like a ninja and profit from this pattern in a data-driven way.

What Is a Three Outside Up Candlestick Pattern?

Three Outside Up Candlestick Pattern Illustration

The three outside up is a three candle bullish reversal pattern that works as intended. Imagine that, for once, conventional trading wisdom is right – well, mostly. 

The pattern extends the classic bullish engulfing pattern and is supposed to provide additional confirmation.

First, let’s understand how to identify these three candle reversal patterns.

How to Identify the Three Outside Up Candlestick Pattern

The following are the requirements for a valid three outside up pattern:

  • The first candlestick must be bearish.
  • The real body of the second bullish candlestick must engulf the first candle’s real body.
  • The third bullish candlestick must close higher than the second candle.
  • The pattern must occur in a downtrend.

We can see this clearly in the candlestick chart above on the Apple daily chart on May 1st, 2018.

The first candle is bearish that closes in the direction of the prevailing bearish trend. The second candlestick engulfs the first candle by opening lower and closing higher than the previous candle. The first and second candles together form a two candle bullish engulfing pattern. 

The third candlestick of the pattern closes higher than the second candle and completes the three outside up pattern. 

Now that we know how to identify the pattern let’s look at how to trade it.

How to Trade the Three Outside Up Candlestick Pattern

The bullish three outside up candlestick pattern should be traded using a bullish mean reversion strategy using an optimal risk-reward ratio of 1:1.

But before we dig into that, let’s look at how traders traditionally attempt to profit from this price action.

Three Outside Up Bullish Reversal Trade Setup

Let’s look at the daily price chart for Amazon (AMZN) on August 27th, 2021.

The existing trend is down, and the first candle reinforces that trend. The second bullish candle engulfs the previous bearish candle. The third candle closes higher than the second candle completing the three outside up pattern.

Traders using this bullish reversal pattern enter the market with a long position once the price breaks above the high of the third candle, with a stop loss below the second candle’s low.

The trade setup of the above example would have resulted in a profitable trade as the price continued to move in the newly established bullish trend.

And while this pattern does work in the crypto and stock markets, there’s a better trading strategy that historically has won in all markets.

Three Outside Up Bullish Mean Reversion Trade Setup

We see the three outside up pattern in the price movement of Microsoft (MSFT) on July 23rd, 2008.

Price is below the fifty-day moving average, constituting a downtrend. On day one, we see a narrow bearish body; the second candlestick is an outside day fully engulfing the first, and day three closes higher than the second.

With the pattern identified, how do we trade it using a bullish mean reversion strategy?

Simple. We enter long when the price reclaims the pattern low with a stop loss equal to one ATR.

In our Microsoft example, we identified the pattern on July 23rd, 2008. The pattern low is $25.48, which occurred on the second candle. Price falls below the low on the 24th, and we buy on the price gap open on the 25th due to price crossing the pattern low.

Our stop loss is set at $24.49, which is never touched, resulting in a profitable trade.

With an understanding of how to trade this pattern, what type of results have we been able to expect historically?

Does the Three Outside Up Candlestick Pattern Work? (Backtest Results)

Using the following rules, I backtested the three outside up candlestick pattern on the daily timeframe in the crypto, forex, and stock markets.

  • A close above the 50-day SMA constitutes an uptrend.
  • I tested risk-reward ranges from 1 to 5. 
  • The optimal risk-reward ratio is selected using profit per bar.
  • Entry and exits are discussed in the how-to trade section above.
  • Confirmation must occur within three days of the pattern signal.

Three Outside Up Bullish Reversal Backtest Results

cryptoforexstock
pattern_namethree outside upthree outside upthree outside up
pattern_categorybullish reversalbullish reversalbullish reversal
pattern_bars333
required_trenddowntrenddowntrenddowntrend
traded_asbullish reversalbullish reversalbullish reversal
stop_bar_typelowlowlow
entry_bar_typehighhighhigh
risk_reward552
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516951
pattern_tickers1577314824
patterns927796169657
trades605549551638
confirm_perc0.650.690.74
wins17978619966
losses426470931672
win_perc0.2960.1430.387
avg_win_bars40.12133.6521.5
avg_loss_bars15.840.6513.71
cons_wins437
cons_losses91815
edge0.78-0.1450.164
cryptoforexstock
pattern_namethree outside upthree outside upthree outside up
pattern_categorybullish reversalbullish reversalbullish reversal
pattern_bars333
required_trenddowntrenddowntrenddowntrend
traded_asbullish reversalbullish reversalbullish reversal
stop_bar_typelowlowlow
entry_bar_typeclosecloseclose
risk_reward551
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516951
pattern_tickers1577314824
patterns916796871683
trades875768865225
confirm_perc0.960.960.91
wins220116536642
losses655652328583
win_perc0.2510.1520.562
avg_win_bars31.9594.745.77
avg_loss_bars11.3629.126.73
cons_wins4411
cons_losses17209
edge0.505-0.090.122

Three Outside Up Bearish Continuation Backtest Results

cryptoforexstock
pattern_namethree outside upthree outside upthree outside up
pattern_categorybullish reversalbullish reversalbullish reversal
pattern_bars333
required_trenddowntrenddowntrenddowntrend
traded_asbearish continuationbearish continuationbearish continuation
stop_bar_typehighhighhigh
entry_bar_typelowlowlow
risk_reward455
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516951
pattern_tickers1577314824
patterns993882373796
trades580408940663
confirm_perc0.580.460.55
wins361783315
losses544391137348
win_perc0.0620.0440.082
avg_win_bars25.7528.079.7
avg_loss_bars3.032.521.84
cons_wins347
cons_losses131729
edge-0.692-0.74-0.51
cryptoforexstock
pattern_namethree outside upthree outside upthree outside up
pattern_categorybullish reversalbullish reversalbullish reversal
pattern_bars333
required_trenddowntrenddowntrenddowntrend
traded_asbearish continuationbearish continuationbearish continuation
stop_bar_typehighhighhigh
entry_bar_typeclosecloseclose
risk_reward555
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516951
pattern_tickers1577314824
patterns1008887074429
trades995876768427
confirm_perc0.990.990.92
wins695155713
losses926825262714
win_perc0.0690.0590.083
avg_win_bars12.884.161.96
avg_loss_bars1.410.570.38
cons_wins368
cons_losses193349
edge-0.585-0.645-0.505

Three Outside Up Mean Reversion Backtest Results

cryptoforexstock
pattern_namethree outside upthree outside upthree outside up
pattern_categorybullish reversalbullish reversalbullish reversal
pattern_bars333
required_trenddowntrenddowntrenddowntrend
traded_asbearish mean reversionbearish mean reversionbearish mean reversion
stop_bar_typeatratratr
entry_bar_typepattern_highpattern_highpattern_high
risk_reward111
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516951
pattern_tickers1577314824
patterns997879773667
trades523525544223
confirm_perc0.520.60.6
wins285346226351
losses238179317872
win_perc0.5450.6590.596
avg_win_bars4.292.652.34
avg_loss_bars3.114.123.08
cons_wins82024
cons_losses3611
edge0.0950.3190.196
cryptoforexstock
pattern_namethree outside upthree outside upthree outside up
pattern_categorybullish reversalbullish reversalbullish reversal
pattern_bars333
required_trenddowntrenddowntrenddowntrend
traded_asbullish mean reversionbullish mean reversionbullish mean reversion
stop_bar_typeatratratr
entry_bar_typepattern_lowpattern_lowpattern_low
risk_reward111
timeframe2015-20212010-20212000-2021
bar_perioddailydailydaily
total_tickers39513516951
pattern_tickers1577314824
patterns1014888874462
trades203146713057
confirm_perc0.20.170.18
wins13610748639
losses673934418
win_perc0.670.7320.662
avg_win_bars1.771.271.44
avg_loss_bars4.941.932.33
cons_wins589
cons_losses356
edge0.340.4620.322

If you’ve been following along as I’ve analyzed every candlestick pattern, you’ll notice that there is some truth to conventional trading wisdom. And perhaps, more importantly, you’ll notice that at trend turning points there is often increased volatility that we traders can exploit for profit.

Similar Candlestick Patterns

Three Outside Down vs. Three Outside Up Candlestick Patterns

The three outside down candlestick pattern and three outside up are both reversal patterns that only differ based on their trend and the final candle.

For instance, the three outside down require a reversal of a downtrend, while the three outside down reverses an uptrend.

Both have a two-day reversal pattern that is confirmed by the third day. In the case of the three outside down, the reversal and confirmation are bearish “down”, while the three outside up patterns are bullish.

Three Inside Up vs. Three Outside Up Candlestick Pattern

The three inside up candlestick pattern and three outside are identical except for the second day. The second bar on a three inside up is an inside bar fully engulfed by the first candlestick, and the three outside up has a bullish outside day candlestick that fully engulfs the first bearish day.

The Bottom Line

The three outside up candle pattern is a bullish reversal pattern that acts as an additional confirmation of the two candle bullish engulfing pattern. 

The pattern is somewhat profitable when traded traditionally, but the ideal way to trade the pattern is to expect volatility and use a mean reversion trading strategy.

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