Three Inside Up

 


Shape:

The Three Inside Up is a bullish reversal candlestick pattern that typically forms after a downtrend.
It consists of three candles:

  • The first candle is a long bearish candle, showing strong selling pressure.

  • The second candle is a smaller bullish candle that forms within the body of the first candle (an inside bar), suggesting that selling pressure is weakening.

  • The third candle is another bullish candle that closes above the high of the first candle, confirming a potential reversal to the upside.

This pattern signals that buyers are gradually gaining control after sellers start losing momentum.

Success Rate:

The Three Inside Up pattern has a moderate-to-high success rate, particularly when it forms at significant support zones or after a prolonged downtrend.

  • Historically, its success rate ranges around 60–68%, depending on market conditions.

  • The reliability increases when confirmed with higher volume on the third candle.

Buy:

  • Enter a buy position when the third candle closes above the high of the first bearish candle.

  • Confirmation with volume is preferred, as it indicates genuine buying strength.

Take Profit (TP):

  • Measure the height of the first bearish candle and project this distance upward from the breakout level for your target.

  • Example: If the first bearish candle is Tk.8 high and breakout occurs at Tk.100, the target would be around Tk.108.

Stop Loss (SL):

  • Place the stop loss slightly below the low of the first bearish candle.

  • This protects against false breakouts and continuation of the downtrend.

Sell:

  • Consider selling if the price fails to rise after the pattern forms and instead falls below the low of the first bearish candle.

  • Also sell when price hits your TP target or shows bearish reversal signals at resistance.

Profit Trailing:

  • Use a trailing stop to protect profits as the price moves higher.

  • Adjust the SL upward by placing it below new swing lows or by using moving averages (e.g., 20 EMA).

Lot Size:

  • Determine lot size according to risk tolerance and account size.

  • Ensure risk on the trade does not exceed 1–2% of total account balance.

Risk-to-Reward Ratio:

  • Aim for at least 1:2 or higher risk-to-reward ratio.

  • For example, risking Tk.5 should ideally target Tk.10 profit.

Leverage:

  • Use leverage conservatively.

  • Remember, while leverage amplifies gains, it also magnifies losses. Stay within safe limits.

Other Conditions:

  • Stronger confirmation if pattern forms near support levels or Fibonacci retracement zones.

  • Works best in oversold conditions or when momentum indicators (e.g., RSI) signal bullish divergence.

  • Higher reliability when volume is stronger on the third candle.

Caution:

  • False signals can occur in choppy or sideways markets.

  • Avoid trading this pattern during strong downtrends without additional confirmation, as it may fail.

  • External factors such as economic news or volatility can reduce reliability.

Pros and Cons of the Three Inside Up Pattern

Pros:

  • Reversal Signal: Clear indication that selling pressure is fading and buyers are taking control.

  • Easy to Identify: The three-candle structure is straightforward for traders.

  • Works Well with Confirmation: Volume and support-zone alignment increase effectiveness.

  • Risk Management Friendly: Provides clear SL below the first candle.

Cons:

  • Moderate Success Rate: Not as strong as other bullish reversal patterns like Morning Star.

  • Volume Dependent: Without volume, the signal may be weak.

  • Market Condition Sensitivity: Less effective in strong bearish or volatile markets.

  • Short-Term Signal: Often gives shorter-term reversals compared to broader continuation patterns.

Trading Psychology of Three Inside Up

Formation:

  • Initial Downtrend: The first bearish candle represents ongoing selling pressure. Market sentiment is pessimistic.

  • Indecision Shift: The second candle, a small bullish one inside the first, signals hesitation among sellers and potential accumulation by buyers.

  • Bullish Confirmation: The third bullish candle breaking above the first candle’s high confirms that buyers have taken control.

Market Sentiment:

  • Buyers’ Confidence: Strength builds as the third candle confirms reversal. Buyers feel the downtrend is exhausted.

  • Sellers’ Exhaustion: Sellers who dominated earlier now face resistance from growing buying pressure.

Breakout Psychology:

  • Anticipation: Traders watching the pattern anticipate a reversal and prepare long positions.

  • Volume Confirmation: Rising volume on the third candle reassures traders that buying interest is genuine.

  • FOMO: Traders fear missing out on the reversal and join the buying momentum, accelerating price rise.

Post-Reversal:

  • Validation: Strong close above the first candle’s high strengthens conviction in the reversal.

  • Profit Taking: Some traders exit at projected targets, while others continue holding due to bullish sentiment.

  • Trailing Stops: Experienced traders trail their stops to lock in profits while riding the trend higher.

Failure and Risk Management:

  • False Signals: If price falls back below the first candle’s low, the reversal fails.

  • Risk Mitigation: Stop-loss placement ensures limited loss.

  • Reevaluation: Traders reassess market context if the pattern fails, possibly shifting to other setups.

General Tips for Managing Trading Psychology:

  • Patience: Wait for confirmation with the third candle’s close.

  • Discipline: Stick to predefined entry, exit, and stop-loss rules.

  • Emotional Control: Avoid FOMO-driven trades without confirmation.

  • Learning: Keep reviewing results and adapt strategies to market conditions.

Understanding the psychology behind the Three Inside Up pattern helps traders trust the reversal and manage trades with confidence.