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A bearish reversal that starts with an engulfing pattern and adds confirmation. Three candles that prove the bears have taken over.
The Three Outside Down is a three-candle bearish reversal pattern. It starts with a bearish engulfing (Candle 2 engulfs Candle 1), and then Candle 3 confirms by closing below Candle 2's close — adding a third candle of bearish continuation.
Think of it as a 'confirmed bearish engulfing.' While a standard bearish engulfing is powerful on its own, the Three Outside Down adds a third candle that says: 'Yes, the reversal is real, and here's proof.' The extra confirmation makes it one of the more reliable reversal signals.
The Three Outside Down adds confirmation to the engulfing reversal story. Candle 1 is a small bullish candle — the uptrend is still technically intact but the small body shows waning momentum.
Candle 2 opens above Candle 1's close and sells off hard, closing below Candle 1's open. This is the classic bearish engulfing — sellers overwhelm buyers in a single session. The 'outside' candle completely wraps the previous candle's body.
Candle 3 is the confirmation. Another bearish candle closes even lower. This eliminates the possibility that the engulfing was just a one-day aberration. Three consecutive days of the bears gaining ground (first the small bull, then the engulf, then the follow-through) creates a high-confidence reversal signal.
Conservative: Enter short on a break below Day 3's low.
Aggressive: Enter short at the close of Day 3.
Above the high of the second (bearish engulfing) candle. The engulfing candle's high marks the reversal point - if price clears it, sellers have lost control.
T1: Previous swing low or support level. T2: Measured move equal to the three-candle pattern height projected downward. T3: Trail partial position for extended moves.
Minimum 1:2. The engulfing + confirmation structure makes this one of the more reliable bearish candlestick patterns.
The Three Outside Down is simply a confirmed bearish engulfing. The third candle removes ambiguity and makes the pattern more reliable than a standalone engulfing. It's one of the most straightforward and high-probability reversal signals.
Bearish engulfing plus follow-through. If the third candle doesn't close at new lows, the pattern lacks conviction.
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