Three Inside Down



Shape:

The Three Inside Down is a bearish reversal candlestick pattern that typically forms at the top of an uptrend.
It consists of three candles:

  • The first candle is a long bullish candle, showing strong buying pressure.

  • The second candle is a small bearish candle that forms inside the body of the first candle, indicating indecision and potential weakening of the uptrend.

  • The third candle is a long bearish candle that closes below the low of the first candle, confirming a reversal and the beginning of a potential downtrend.

Success Rate:

The Three Inside Down pattern has a relatively good success rate, especially when it appears near resistance levels or after a prolonged uptrend.
Studies suggest its success rate ranges between 60–68% in predicting bearish reversals, higher when confirmed with volume and other indicators.

Sell:

  • Enter a sell position when the third candle closes below the low of the first bullish candle, confirming the bearish reversal.

  • Ideally, confirmation should come with increased volume on the bearish candle.

Take Profit (TP):

  • Measure the height of the first candle and project this distance downwards from the entry point to set the initial take profit target.

  • Example: If the height of the first bullish candle is Tk.8 and the entry point is Tk.100, the target would be Tk.92.

Stop Loss (SL):

  • Place the stop loss slightly above the high of the first bullish candle.

  • This helps limit losses if the reversal fails and the uptrend resumes.

Buy:

  • Not applicable directly — this is a bearish reversal pattern.

  • Consider buying only if an opposite bullish pattern forms after the decline.

Profit Trailing:

  • Use a trailing stop to secure profits as the price continues downward.

  • Adjust the stop loss level lower as the price falls, keeping it a set distance (e.g., a percentage or taka amount) above the current price.

Lot Size:

  • Determine lot size based on your account balance and risk tolerance.

  • Ensure the potential loss (entry price to stop loss distance) does not exceed 1–2% of your account balance.

Risk-to-Reward Ratio:

  • Aim for at least 1:2 or better, where the expected reward is double the potential risk.

Leverage:

  • Use leverage with caution.

  • While it increases profit potential, it can also amplify losses. Stick to conservative leverage when trading reversal patterns.

Other Conditions:

  • Works best after a clear uptrend near resistance or overbought zones.

  • Additional confirmation from RSI divergence or volume decline strengthens the signal.

Caution:

  • False signals can occur in sideways or weakly trending markets.

  • Avoid trading this pattern without confirmation from the third candle’s close below the first candle’s low.

  • External factors and news events can influence the reliability of this pattern.


Pros and Cons of the Three Inside Down Pattern

Pros:

  • Reliable Reversal Signal: Offers a clear bearish reversal setup, especially at the top of an uptrend.

  • Well-Defined Structure: The three-candle formation is straightforward and easy to recognize.

  • Clear Entry/Exit Points: Provides obvious levels for entry (below first candle’s low) and stop loss (above first candle’s high).

  • Volume Confirmation: When supported by high volume, it adds to reliability.

Cons:

  • Moderate Success Rate: While decent, it is not as strong as some other reversal patterns.

  • Volume Dependency: Without increased volume on the third candle, reliability decreases.

  • Market Dependency: Less effective in choppy or sideways markets.

  • Short-Term Nature: Primarily useful for short- to medium-term reversals rather than long-term trend changes.


Trading Psychology of Three Inside Down

Formation:

  • Initial Uptrend: The long bullish candle reflects strong buyer confidence and continuation of the uptrend.

  • Indecision Candle: The second, smaller bearish candle inside the first candle’s body signals hesitation — early signs of exhaustion among buyers.

  • Bearish Confirmation: The third strong bearish candle shows sellers have taken control, confirming a shift in market sentiment.

Market Sentiment:

  • Buyers’ Exhaustion: The second candle highlights weakening buying pressure.

  • Sellers’ Confidence: The third candle closing below the first candle’s low reflects strong selling interest and increased bearish sentiment.

Breakout Psychology:

  • Anticipation: Traders recognizing the Three Inside Down pattern anticipate a reversal and prepare for short positions.

  • Volume Confirmation: High volume on the third candle reassures traders that bears are in control.

  • FOMO in Bears: As the down move starts, more traders jump in short, fearing they will miss out on the decline.

Post-Reversal:

  • Validation: The third candle closing below the first candle’s low confirms the pattern, strengthening bearish confidence.

  • Profit-Taking: Some traders book partial profits at support zones, while aggressive traders aim for extended targets.

  • Trailing Stops: Many use trailing stops to lock in profits while allowing the downtrend to continue.

Failure and Risk Management:

  • False Signals: If the third candle fails to close below the first candle’s low, the reversal may not be valid.

  • Reevaluation: Traders should reassess if the pattern fails, looking for other bearish confirmations before re-entering.

  • Risk Control: Stop-loss discipline is critical, as false reversals can quickly turn back into rallies.

General Tips for Managing Trading Psychology:

  • Patience: Wait for the third candle’s confirmation before entering.

  • Discipline: Stick to your trading plan with clear SL and TP.

  • Emotional Control: Avoid chasing trades out of fear or excitement.

  • Continuous Learning: Always analyze volume, market conditions, and confluences with other indicators.

Understanding the psychology behind the Three Inside Down helps traders anticipate when buying pressure weakens and selling pressure begins to dominate, improving confidence in reversal trades.