Candlestick charts indicate the possibility of a change in the prices of financial securities, outline the possible change in trend in the market (up or down), and, thus, provide opportunities to investors for buying or selling. In this regard, the Three Outside Down Candlestick Pattern is a great indicator that an upward trend might be coming to an end.
What is a Three Outside Down Candle Pattern?
The Three Outside Down pattern usually occurs during an uptrend and involves three candles. It starts with one bullish candle, followed by two bearish candles. This pattern helps predict whether the trend might change. So spotting it correctly is important for trading against the current trend.
The Three Outside Down Pattern is a bearish pattern with the following features:
- An upward market.
- The first candle of the pattern is bullish.
- The second is a big candle that goes down, covering the first one.
- The third candle is also down and closes lower than the second.
How does a Three Outside Down Candlestick Pattern look like?
The Three Outside Down Candlestick Pattern looks as follows:
1st: The first is small and green in colour, indicating a slight upward move.
2nd: It is also a big red candle. It starts a bit higher than the first one and closes lower, making the first one completely part of its body.
3rd: It, too, is a red candle, but bigger. Not only does it start below the second one's middle, but it also closes much lower.
Importance of Three Outside Down Candle Pattern for Traders
The first candle forms during an upward trend, and the price closes above its opening level, boosting buyer confidence. In the case of the second candle, after rising, it falls back, which is an indication that things are going to turn around. This will see the buyers trying to safeguard their profits since the trend is turning around.
The price declines further in the third candle, breaking the range of the first candle to the downside, which is a confirmation of a bearish trend and time for sellers to act.
How to Trade using the Three Outside Down Candlestick Pattern?
Follow these simple steps to use Three Outside Down candle pattern in trading:
- Note the Pattern: Look for a pattern where a small bullish candle is followed by a larger bearish candle that completely envelops the first one. The third candle should also be bearish and close below the second one.
- Check for Confirmation: Use other tools like RSI, Moving Averages, or volume to confirm that the pattern is signaling a real trend change.
- Place a Sell Order: If the pattern is confirmed, consider placing a sell order just below the low point of the third candle.
- Placing Stop Loss: To protect yourself from losses, set a stop loss above the highest point of the pattern.
Remember that the trade will have some risks, so a good plan and consideration of market news and past performance must always be present.
Advantages & Disadvantages of Three Outside Down Candle Pattern
The table below shows the advantages and disadvantages of three outside down candlestick pattern:
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Three Outside Down Candle Pattern
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Advantages
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Disadvantages
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- Works in Different Markets: What makes the Three Outside Down pattern versatile is the application of the tool in different markets, including stocks, forex, and commodities.
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- May Give False Signals: This, however, is true with all patterns, as they sometimes tend to indicate the other way incorrectly. Traders have to be careful in such situations.
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- Strong Signal for Downtrend: This pattern is the best indication that the uptrend will change into a downtrend, so it helps the trader take the decision in time.
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- Not Always Accurate: While useful, this pattern is not always exact. Be prepared to use other indicators for market changeability.
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- Strongest Confirmation: The three-candle structure of this pattern and especially the strong third bearish candle make this signal very reliable for a downtrend, bringing confidence to the traders to take action.
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- Different Interpretations: Different traders may interpret this pattern differently, and this can result in different conclusions as to whether it is strong or bearish/reliable.
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