A high credibility bullish reversal pattern ‘Three Outside Up’ consists of a small black candle followed by two white candlesticks. The first two actually makes up a medium credibility reversal pattern ‘Bullish Engulfing’ while the third white candle with a higher close serves as a confirmation giving the complete setup its high credibility rating.
Technical Description
1) Preceded by a bear market the first candlestick in the pattern should be black, ideally small though not necessarily.
2) The body of the second candlestick is white and should fully engulf the preceding black candle.
3) Ideally the wick and tail of the first candle should also be engulfed though this is not necessary.
4) We see another white candle for the third in the series with its close above that of the second candle.
5) Ideally the third candlestick should not be a doji or spinning top though this may be permissible if a gap up is present.
Mark’s Perspective
As a confirmed form of a ‘Bullish Engulfing’ the ‘Three Outside Up’ pattern can be traded aggressively, i.e. buys can be taken following the formation of the pattern. This is particularly true if the preceding bear market saw prices tanking sharply over a short period of time. Stops should be placed below the second candlesticks low.
When the pattern consists of extremely large candlesticks there is a risk of being overextended. The prudent course of action will be to step aside perhaps even wait for better pricing within the body of the third candle before buying. Given the ranges involved tight stops may be placed below the third candlesticks’ low.
After forming a ‘Bullish Engulfing’ for the first two candle’s one way of looking at the ‘Three Outside Up’ pattern is capitulation. The bears throwing the towel are responsible for the third white candle.