Three Outside Up Candlestick Pattern: Definition, Trading Rules and Tested Statistics

The three outside up candlestick pattern is a three-candle bullish reversal pattern that appears after a downtrend: a small bearish candle, a larger bullish candle whose body engulfs it, and a third bullish candle that closes higher. It is the confirmed version of the bullish engulfing. Its mirror image, the three outside down, is a bearish reversal pattern that appears after an uptrend.

This guide explains how to identify the pattern, the psychology behind it, how traders trade it with an entry, a stop loss and a target, and what actually happened after it. Our test bench scanned full price history and detected 11,258 occurrences on the daily chart alone across stocks, crypto, forex, ETFs, indices and commodities, and compared the outcome with random days on the same markets.

What is the three outside up candlestick pattern?

The three outside up is a candlestick pattern that consists of three consecutive candlesticks at the end of a downtrend. The first two candles form a bullish engulfing; the third one confirms the reversal signal by closing above the second. The name describes the structure: the second candle is "outside" the first, since its real body covers the whole body of the first candle.

Definition and market context

The pattern needs a downtrend before it, and it forms only after the trend has run for a while. Without a prior decline there is nothing to reverse, and the same three candles are just a strong move inside a range or a pause before continuation. Greg Morris, in Candlestick Charting Explained, presents this pattern as the confirmation of the bullish engulfing, the same way the three inside up confirms the harami. Both belong to the same family of confirmed signals.

Our bench uses the same rule, written so a computer can apply it without judgment: after a downtrend (the last close before the pattern is at least one average true range below the close 10 bars earlier, and in the lower half of the last 40 closes), a bullish engulfing, then a white candle closing above the second one. The CDL3OUTSIDE function of the open-source TA-Lib library uses a similar engulfing and the same higher close, without the trend condition and without requiring a white third candle. On candle shape alone, our rule finds about 86% of its bullish and 79% of its bearish occurrences.

Where it fits among candlestick patterns

Candlestick patterns can be grouped into reversal patterns, which signal a potential change of trend, and continuation patterns, which signal that the trend should resume. Within the reversal group, candlestick analysis distinguishes single-candle signals such as the hammer, two-candle patterns such as the engulfing and the harami, and three-candle patterns such as the morning star, the three inside up and this one. The three-candle candlestick patterns all add a confirmation to a shorter signal, and candlestick analysis applies them to stocks, crypto and forex alike.

The bullish reversal signal explained

The signal is the sequence. The first candle continues the decline. The second candle opens at or below the first close and closes above the first open: buyers have taken back the whole session of the sellers and more. The third candle shows that buying pressure did not vanish the next day. Traders read it as a potential trend reversal with a built-in confirmation, which is the argument for ranking it above a lone two-candle signal.

The chart below is not drawn by hand. It is the median shape of the clean patterns our bench detected, with the faded candles showing the decline before it and the lines of the position we test: entry above the pattern high, stop below the pattern low, target at twice the risk.

Anatomy of the three outside up pattern

Identifying the three-step formation

• First candle: bearish (black or red), in line with the prior trend, with a body smaller than the second one.
• Second candle: bullish, with a real body that covers the whole body of the first candle. It opens at or below the first close and closes above the first open.
• Third candle: bullish, and it closes above the second candle.

The role of the engulfing candle

The second candle is the heart of the pattern. A long bullish candle that engulfs the previous one shows a change of control within one session. The larger its body compared with the first candle, the clearer the shift in market sentiment. On the median occurrence, the three candles together span 6.32% of price, or 1.92 times the average true range (ATR): a larger move than a typical session.

Importance of the confirmation candle

The third candle is what separates this pattern from a plain two-candle setup. With a two-candle signal, confirmation means waiting for the next session; here it is built in. The cost is time: the entry comes one session later, at a higher price. The third bullish candle must close above the second one. A stricter variant also wants it to make a new high; the standard definition only asks for the higher close.

Three outside up vs. three outside down

Understanding the bearish counterpart

The three outside down is the same structure upside down, after an uptrend: a small bullish candle, a larger bearish candle that engulfs it, and a third bearish candle that closes below the second. It is a classic bearish reversal signal in technical analysis.

Key differences in market sentiment

The bullish version shows buyers taking control after a decline; the bearish version shows sellers taking control after a rally. In our data, the bearish one was more common (15,700 daily occurrences against 11,258), and neither beat chance. After the bearish pattern, price was lower 10 days later in 46.0% of cases, against 46.1% for random days, and its average excess return (−0.09%) is rated no clear edge: within the margin of error.

How to identify the three outside up pattern on charts

Step-by-step visual identification

1. Confirm the downtrend: the last close before the pattern is at least one average true range below the close 10 bars earlier, and in the lower half of the last 40 closes, or the market keeps making lower highs.
2. Find a bearish candle, then a bullish candle whose body covers it completely.
3. Wait for the third candle to close. It must be bullish and close above the second one.
4. Mark the high and the low of the three candles: they define the entry and the exit if the pattern fails.

To identify the pattern quickly, start from the second candle: if it is a long bullish candle that opens below the previous close and closes above the previous open, check the trend before it and wait for the next session. Different platforms use different thresholds, so learn to identify it by eye as well.

Distinguishing the pattern from an engulfing setup

A bullish engulfing is two candles; this pattern is the same two candles plus a confirmation candle. About three in four occurrences also count as a bullish engulfing on our separate engulfing rule, but most two-candle setups are not followed by a higher close. Our bench found 59,948 bullish engulfing patterns on the daily chart, against 11,258 three-candle patterns.

Common mistakes in pattern recognition

• Ignoring the trend: three candles that go up in a range are not a reversal pattern.
• Taking every signal: in a steep decline, the formation can mark a bounce rather than a trend change.
• Accepting a second candle that only covers the shadow, not the body, of the first.
• Marking the pattern before the third candle closes.
• Confusing it with the three inside up, where the second candle sits inside the first.

Psychology behind the three outside up pattern

Why market momentum shifts

During a decline, the bears are in control and each session confirms the bearish view. The first candle of the pattern is one more bearish session. Then the second session opens low, attracts buyers, and closes above the open of the day before. Short sellers who expected another drop are now losing, and some of them buy back, which adds momentum to the move. For a moment, the bulls take control of the market and the bearish run of the prior days stalls.

The battle between buyers and sellers

The third session is the test for the bulls. If the bears were still in control, the gains of the second candle would be erased. A higher close on the third bullish candle tells traders that the bulls held their ground for two sessions in a row. That is the story. Whether it changes what the market does next is a question for data, which we answer in the reliability section.

Reversal or continuation: reading the signal in context

This formation is classified as a bullish reversal pattern, not a continuation pattern. In trading, though, the same candles can mark a short pause in a bear market: a reversal signal inside a strong bear trend can end as a bounce, with the decline resuming. Traders read reversal signals in the context of the larger trend, the support and resistance levels around price, and the market they trade.

A simple trading checklist before acting on the pattern:

• Is the market in a clear downtrend, so that a reversal makes sense?
• Does the pattern form at a support level, where reversals have a reason to happen?
• Is there resistance just above, which would limit the profit potential?
• Does the third candle close near its high, showing strong buying into the close?
• Do other trading signals agree, such as momentum indicators or the trend on a higher timeframe?

None of these filters turns the pattern into a reliable trading signal on its own: our statistics below show that the candles alone did not beat chance. They are meant to screen out the weakest setups, a use we have not tested, and they make you decide in advance where the idea is wrong.

How to trade the three outside up pattern

The classic trading plan buys a break above the high of the pattern, with a stop loss below its low and a profit target set as a multiple of the risk. This is the setup our bench simulates on every occurrence, for swing trading on the daily chart as well as for intraday trading.

Entry strategies for long positions

There are two ways to enter a long position. The aggressive one buys at the close of the third candle; traders who enter there get a better price but no protection if the next session reverses. The conservative one places a buy order just above the pattern high and waits for price to trade through it. In our tests that order was filled in 88.1% of cases, so it works as a filter; in 11.3% of cases, price broke the pattern low first and the setup was canceled before any trade; the few remaining orders expired untouched after 20 bars or when the data ended.

Stop loss placement for risk management

Setting realistic profit targets

The target we test is twice the risk (2:1). Trades that reached that target took a median of 18 days; losing trades took a median of 9 days to fail. The next resistance level, a prior swing high or a falling moving average above price, is another possible target, which we have not tested. You can also take partial profits at 1 R and move the stop to the entry, or exit when price closes below the low of the previous candle. Both are ways to protect profits; we tested only the fixed 2:1 version.

Trading strategies for this pattern

None of these trading strategies is proven in the sense of a guaranteed edge. They are ways to add context to the candles, and each should be tested on your own market before you risk money on it.

Strategy 1: Trading with support levels

Wait for price to reach a support level already marked on the chart, then take the pattern only if it forms there. The idea is to combine a level where buyers acted before with a signal showing that they act again. Support and resistance levels give the reversal a reason to happen where it does.

Strategy 2: Combining with moving averages

Take the pattern only in the direction of the larger trend, for example when price is above its 200-day moving average and the decline was a pullback. We measured this filter: the setup reached its 2:1 target in 35.1% of cases above the 200-day average, in an uptrend, and 37.1% below it. The filter made almost no difference.

Strategy 3: Using RSI divergences for confirmation

Look for a bullish divergence on the RSI: price makes a lower low while the indicator makes a higher low, then the pattern forms. It combines a technical indicator, here a momentum oscillator, with candlestick signals. We have not tested it.

Strategy 4: Fibonacci retracement confluence

You can also look for the pattern at a 50% or 61.8% retracement of the previous rise, where several reasons to buy meet. We have not measured it either.

Strategy 5: Pullback trading on naked charts

Without any indicator, read the price structure: an uptrend with higher highs on the higher timeframe, a pullback on the lower one, and the pattern at the end of the pullback. The candles are used to time the end of the correction, not to call a new trend.

Best timeframes and market conditions

The pattern forms on every timeframe and in every market. Daily candlesticks suit swing trading, hourly ones day trading and the weekly chart position trading. The same rules confirm the candlestick pattern everywhere: a strong second candle, a higher close on the third one and, at the same time, room before the next resistance. Momentum indicators and the trend on a higher timeframe can support the case of the bulls; they are meant to filter out some false reversals before you enter long, a use we have not tested.

Do higher timeframes increase reliability?

Our data does not show it. On the weekly chart the setup reached its 2:1 target in 42.7% of cases, against 41.1% on random weeks. On hourly bars it was 31.3% against 31.4%. The raw numbers rise with the timeframe, but so does the random baseline, and on both timeframes the average result per trade (+0.34 R against +0.30 R weekly, +0.01 R against 0.00 R hourly) stays within the margin of error.

Best markets for this candlestick pattern

No market stood out: the pattern works about the same way in stock, crypto and forex markets. In daily stock trading, the setup reached its target in 36.0% of cases against 36.7% on random dates; on crypto, 39.2% against 33.2%; on forex, 29.9% against 32.0%. In none of these markets does the average result per trade (+0.14 R against +0.15 R on stocks, +0.19 R against +0.01 R on crypto, −0.04 R against +0.02 R on forex) pass our statistical test.

Advantages and limitations of the pattern

Strengths of the pattern

• Clear rules: three candles, each with a precise condition.
• A built-in confirmation, so fewer false starts than a lone two-candle signal.
• A defined risk: the exit goes below the pattern low.
• Frequent: about one occurrence every 753 bars on the daily chart, so it gives regular trading signals.

When the pattern fails: identifying false signals

• On its own, it did not beat chance in any market or timeframe we tested.
• 11.3% of daily setups were canceled before entry.
• Of the daily trades that hit their stop, 23.1% had first been up 1 R.
• The confirmation candle makes the entry later and the risk wider.
• In a sideways market, three rising candles can simply be a swing inside the range.

Comparison with other triple candlestick patterns

Three-candle patterns share one idea: a signal followed by a confirmation. Here is how this one compares with the two patterns closest to it.

Three outside up vs. morning star

The morning star is also a three-candle bullish reversal pattern, but its middle candle is small and gaps down: indecision before the reversal. Here, the middle candle is the largest. The morning star setup reached its 2:1 target in 40.6% of cases against 34.2% on random dates, a larger gap in hit rate, though its average result per trade still did not beat chance significantly.

Three outside up vs. three inside up

The three inside up starts with a harami: a large bearish candle and a short bullish candle inside its body. This one starts with an engulfing: a short bearish candle and a large bullish candle around it. Both end with a confirmation candle. The three inside up reached its 2:1 target in 35.8% of cases against 37.6% on random dates. Neither of these candlestick patterns beat chance.

Statistical reliability and performance

What data tells us about success rates

The three outside up candlestick pattern is not reliable on its own: in most markets and timeframes we tested, it was followed by a rise about as often as a random candle on the same markets, or slightly less often: on hourly charts the gap is rated worse than chance, and on daily charts no clear edge. A few rows came out above random bars, such as weekly forex (57.1% against 49.6%), daily indices (58.2% against 57.6%, though its average excess return, −0.36%, rates No clear edge) and weekly charts as a whole (56.7% against 56.0%), but none of them is a confirmed edge in our tests. Here are the numbers from our test bench.

Read the table in pairs of columns. On the daily chart, 51.6% of patterns were followed by a higher price 10 days later. That sounds bullish until you see that 52.5% of random days on the same markets were too: stocks, which make up most of the sample, rise a little more often than they fall. The excess return over the rest of the market after 10 days is −0.11%, with a 95% confidence interval from −0.34% to +0.10%. Zero is inside the interval: no measurable difference from the rest of the market, rated no clear edge.

The expectancy column gives the average result of the 2:1 setup in R (multiples of the risk), before costs, next to the same entry, exit and target on random dates. On that timeframe, +0.14 R against +0.13 R: the positive value comes from the general rise of stocks over time, not from the pattern. On hourly bars, it did slightly worse than the rest of the market, with an excess return of −0.06%, rated Worse than chance: the gap is small, but it survives our correction.

The bearish version gave a similar picture. On 15,700 daily bearish patterns, 46.0% were followed by a lower price 10 days later, against 46.1% for random days, an excess return rated no clear edge, and the 2:1 short setup had an expectancy of −0.13 R, against −0.15 R on random dates.

Backtesting your own rules

The breakdowns below are descriptive, not corrected for multiple testing. Patterns with volume above 1.5 times the 20-day average were higher 10 days later in 51.7% of cases, against 51.7% on normal volume: high volume did not help. Above the 200-day moving average, the excess return was −0.20%; below it, −0.10%. The result was not stable over the years: −0.33% in the first half of the history, +0.11% in the second.

If you want to use it in your trading plan, backtest your own version: add a filter (support, trend, momentum), record every occurrence, and compare the result with the same setup on random dates. That comparison is the only way to know whether your filter adds anything. The full method is in our methodology.

Case studies of the pattern

The gallery in the Real examples section shows real patterns picked by our bench, with their actual outcome. The case studies here come from our bench's detections on crypto charts: daily, except the last one, on an hourly chart.

Case study: a pattern that reached its target

BNB/USDT printed a bearish candle on June 22, 2025, a bullish candle that engulfed it on June 23, and a third bullish candle on June 24 that closed at 643.53, above the second close at 640.49. The buy order at the pattern high (644.09) was filled on June 25, with a stop at 601.25 and a 2:1 target at 729.77. Price reached the target on July 18, 2025, and was 1.6% higher 10 days after the pattern.

Case study: a trade stopped out

ETC/USDT formed the pattern from June 8 to 10, 2025, with a last close at 18.56. The buy order at 18.61 was filled on June 11. Two days later, on June 13, 2025, price fell through the low of the pattern at 16.62: a full 1 R loss. ETC was 13.1% lower 10 days after the pattern.

Case study: a setup canceled before entry

NEAR/USDT completed the bearish version on December 28, 2021, with a third candle that closed at 13.335, below the second close at 14.752. Price never traded below the pattern low at 13.036: in the first days of January 2022, it rose above the pattern high at 16.49, and the setup was canceled without a trade. NEAR was 12.9% higher 10 days after the pattern.

Case study: a bearish trade that reached its target

On the hourly chart of SOL/USDT on November 25, 2020, a white candle opened at 2.4253 and closed at 2.4719; the next one opened above it, at 2.4764, and closed at 2.4167, below that first open, a long black body covering the whole white one; a third black candle then closed at 2.3404. The sell order at the pattern low (2.30) was filled two hours later, with a stop at the pattern high (2.4779) and a 2:1 target at 1.9442. By 03:00 on November 26, SOL had fallen to 1.782, through the target: a gain of 2 R on the short trade. This case is also a card in the hourly crypto gallery.

Tools for finding the pattern

Charting platforms can scan for this candlestick pattern and set alerts on it. The open-source TA-Lib library provides the CDL3OUTSIDE function, which returns both the bullish and the bearish version, and TradingView offers community scripts that flag it. Check the definition your tool uses: some require a prior trend, some do not, and that changes the results. A scanner finds the formation; your analysis decides whether to follow it. Indicators and scanners do not change what the candles mean.

Frequently asked questions about the three outside up

Summary of key points

• The three outside up is a bearish candle, a bullish candle that engulfs it, and a third bullish candle that closes higher, after a downtrend.
• The bearish mirror image appears after an uptrend and works the same way, with no edge either: on daily charts its result is within the margin of error, and on hourly charts it did slightly worse than the rest of the market, rated worse than chance.
• On 11,258 daily occurrences, 51.6% were higher 10 days later, against 52.5% for random days.
• The 2:1 setup reached its target in 36.3% of cases against 36.0% on random dates, with an expectancy of +0.14 R against +0.13 R before costs.
• Volume and the 200-day moving average changed the results only slightly.

If you trade this pattern, treat it as a place to define a position, not as a reason for one. Set the exit below the pattern low before entry, size the position on that distance, and keep the risk per trade small.

About the author and the data. Written by Amaury, founder of PatternsWizard, who is passionate about finance, quantitative trading and data analysis. He built the PatternsWizard test bench, which detects each setup with fixed, published rules on full market history: crypto, forex, US stocks, ETFs, indices and commodities. Trades and win rates are compared with random bars on the same assets, excess returns with the rest of the market, with error margins and a correction for multiple testing, and the whole pipeline is checked on random-walk prices, where nothing can be predicted. Statistics on this page were generated on November 5, 2026. The full methodology explains every step.