What it is
The Three Outside Up is a three-candle bullish reversal pattern that builds on the Bullish Engulfing. Day 1 is a bearish candle continuing the downtrend. Day 2 is a large bullish candle that completely engulfs Day 1's body. Day 3 closes even higher, confirming the reversal.
What makes this pattern powerful is the confirmation element. A Bullish Engulfing alone can fail, but when Day 3 follows through with a higher close, it shows that the buying pressure from Day 2 wasn't a one-off event - momentum has genuinely shifted.
The psychology
Day 1 is the status quo. Bears are in control, price closes lower, nothing unusual. Sellers feel comfortable, shorts are profitable.
Day 2 changes everything. The bullish engulfing candle opens below Day 1's close (gap down or lower open) but then reverses hard, closing above Day 1's open. This catches sellers off guard - their profitable positions are suddenly underwater. The wide range shows aggressive buying.
Day 3 is the verdict. If Day 2 was just a short squeeze or dead cat bounce, Day 3 would give it back. Instead, buyers follow through with another higher close. This confirms the sentiment shift and often triggers a cascade of short-covering and new long entries.
Identification
- 01Prior downtrend - Must appear after a meaningful decline
- 02Day 1 bearish - Red/filled candle continuing the existing trend
- 03Day 2 bullish engulfing - Opens below Day 1 close, closes above Day 1 open
- 04Day 3 bullish confirmation - Closes higher than Day 2's close
- 01Day 2 volume spike - High volume on the engulfing candle shows conviction
- 02Day 3 also on strong volume - Sustained participation, not just covering
- 03Day 1 is a small candle - Greater contrast with the large engulfing body
- 04Pattern at key support - Confluence with horizontal support or trendline
- 01No prior downtrend - Pattern needs bearish context to reverse
- 02Day 2 doesn't fully engulf - Partial engulfing weakens the signal
- 03Day 3 closes below Day 2 - Failed confirmation invalidates the setup
- 04Very low volume throughout - Suggests lack of institutional participation
Execution framework
Standard: Enter at Day 3 close or Day 4 open once confirmation is clear.
Aggressive: Enter during Day 3 if price is trending higher and above Day 2's close.
Below the low of Day 2 (the engulfing candle). This is the point where the entire pattern is invalidated - if sellers can push below that low, the reversal has failed.
T1: Nearest resistance or previous swing high. T2: Measured move equal to the height of the three-candle pattern projected upward. T3: Trail remaining position using a moving average or structure.
Typically 1:2 to 1:3 depending on the size of the engulfing candle. Larger Day 2 candles mean wider stops but often signal stronger reversals.
Context matters
The Three Outside Up is one of the more reliable candlestick reversal patterns because it includes built-in confirmation. But context still determines whether it leads to a sustained move or just a temporary bounce.
- 01At the end of a sustained downtrend with oversold readings
- 02At a well-tested horizontal support level
- 03With a volume surge on Day 2 that exceeds recent average
- 04When Day 3 closes near its high (strong conviction)
- 05At Fibonacci retracement levels (61.8% or 78.6%)
- 06With bullish divergence on RSI or MACD
- 01In the middle of a range with no clear support
- 02After only a minor pullback rather than a real downtrend
- 03Low volume across all three candles
- 04Day 3 closes with a long upper wick (rejection at highs)
- 05Against a dominant higher timeframe downtrend
- 06Multiple failed Three Outside Up patterns in same area
Compare Day 2's volume to the 20-day average. If it's at least 1.5x average, the pattern's success rate increases significantly.
Compare the full pattern set
Use the library to compare similar structures before deciding what the chart is actually building.