The ‘Three Inside Down’ pattern consists of two black candles and an initial big white candlestick. The second candle is typically small and must be black and inside the body of the first, forming a low credibility ‘Bearish Harami’ while the third candlestick should close under the low of the second candlestick. Being black with a lower close the third candlestick effectively gives us a confirmation of the ‘Bearish Harami’ pattern making the whole ‘Three Inside Down’ setup a high credibility candlestick pattern.
Technical Description
1) Preceded by a bullish market the first candle of the pattern should have a long white body.
2) The second candlestick is black opening and closing inside the body of the first.
3) Ideally the wick and tail of the second candle should also be contained inside the body of the first though this is not necessary.
4) The third black candlestick should have a lower close than the second candle; ideally this will have a big black body though this is not a necessity.
5) The third candlestick should not be a doji or spinning top.
Mark’s Perspective
‘Three Inside Down’ patterns come in a variety of shapes, the most common with the second candlestick near its top is sometimes misidentified as an ‘Evening Star’. Where the third candlestick closes, inside the body of the first or beyond it could also affect the overall picture.
If the first candlestick is an extremely long white it may be possible to use a scaled entry the immediate objective the patterns lows where another position may be added at its break. Stop losses should be placed above the pattern’s high.
Should the third candlestick close below the lows of the first check whether the pattern is overextended. If the latter will be the case look for prices to pullback well inside the body of the third candlestick before taking action. Stops should be placed just above the patterns high.