Three Outside Up Candlestick Pattern – Psychology

The formation of Three Outside Up Candlestick pattern generally shows a change in the market sentiment and the appearance of this pattern during a downtrend indicates a potential reversal in the stock.

During a downtrend, the first red candle shows that there was more selling pressure in the stock. However, the next candle formed is a green candle which completely engulfs the previous red candle suggests that the buyers have overpowered the sellers in the stock.

The formation of the third green candle which closes above the close price of the second candle acts as a confirmation of the change in the market sentiment. This change in market sentiment can potentially bring in more buying pressure and hence the formation of this pattern is generally seen with a bullish momentum.

Three Outside Up Candlestick Pattern – Trading Ideas

Traders must ensure that the prior trend before the formation of this pattern is a downtrend. Once this pattern is formed in a downtrend, the following are the guidelines to take a trade:

• ENTRY: When the price of the security starts trading above the close price of the third candle of the Three Outside Up Candlestick pattern, traders can take a long position.
• TARGET: Traders can exit the trade when the price of the security reaches the immediate resistance zone. Once this level is reached, one can also book partial profits in the trade and hold on to the remaining position until the next resistance level.
• STOP LOSS: Traders can place the stop loss near the low price of this pattern.

Three Outside Up Candlestick Pattern – Example

In the above one-day chart of AXIS BANK, we can observe the formation of the three outside up candlestick pattern after a short downtrend. As discussed above, the price of this stock saw a bullish reversal after the formation of this pattern.

At the time of the formation of this pattern, traders could have taken a long position above Rs. 620.25 and the stop loss was at Rs. 580.55

Three Outside Up Candlestick Pattern – Strengths

In certain scenarios, the Three Outside Up pattern carries enhanced significance for signalling a bullish reversal, particularly when it forms within a strong support zone. This zone, having repelled price action multiple times in the past, adds weight to the pattern’s implications. Its occurrence within this zone suggests that there is a demand for the stock near that price.

Moreover, coupling this pattern with the Relative Strength Index(RSI) can amplify its bullish reversal signal. If, at the pattern formation, the RSI indicates oversold conditions, it strengthens the case for bullish momentum. An oversold RSI implies prolonged selling pressure, presenting an opportune moment for buyers.

By combining these indicators, traders gain a more robust assessment of potential success, leveraging the pattern’s formation and RSI’s oversold signal for higher probability trades.

Read more: Stocks With High Promoter Pledge In India

Conclusion

A powerful instrument in a trader’s toolbox, the Three Outside Up candlestick pattern provides an obvious indication of a bullish turnaround following a downward trend. Traders may successfully use this pattern to their trading methods by comprehending its creation, psychology, and trading tactics.

But before making trading decisions, like with any technical indicator, it’s important to take into account other elements including market circumstances, trend strength, and risk management.

Written by Praneeth Kadagi

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