Three Inside Up Candlestick pattern

The 3 Inside Up candlestick pattern is a bullish reversal pattern that signals a potential end to a downtrend and the beginning of an uptrend. It’s a three-candle formation that indicates that selling pressure is weakening and buyers are stepping in to push the price higher. This pattern is highly valued in technical analysis because it offers traders an early indication that momentum may be shifting from bearish to bullish.

Structure of the Three Inside Up Candlestick Pattern

1. First Candle: Large Bearish Candle

• The pattern begins with a long bearish (red) candle that indicates strong selling pressure. This candle is part of an established downtrend and reflects that sellers are in control, pushing the price downward.
• Key Characteristics:
  • This candle should have a large body, representing significant downward movement.
  • Its length shows that sellers had significant control and there’s a bearish sentiment in the market.

2.Second Candle: Small Bullish Candle Inside the First Candle’s Body

• The second candle is a small bullish (green) candle that opens and closes within the range of the first candle’s body, often referred to as a Harami pattern.
• This candle signals that the selling momentum is slowing down and that buyers are starting to gain confidence.
• Key Characteristics:
  • It should be contained entirely within the body of the first bearish candle.
  • This candle’s presence suggests indecision or hesitation among sellers, with buyers starting to emerge.
  • This smaller candle signals a potential reversal but does not yet confirm it.

3.Third Candle: Strong Bullish Candle Closing Above the Previous Candle

• The third candle is a larger bullish (green) candle that opens higher than the second candle’s close and ideally closes above the open of the first bearish candle. This is the confirmation candle for the pattern.
• This candle solidifies the pattern, indicating that buying pressure has overtaken selling pressure and that the price could continue to rise.
• Key Characteristics:
  • It should have a strong upward movement, often closing above both the second and first candles.
  • This candle confirms the shift in momentum from bearish to bullish, suggesting the downtrend may be reversing.

Trading Strategy with the Three Inside Up Pattern

Entry Point: Traders often look for entry just above the high of the third bullish candle to confirm the reversal.

Stop-Loss: To minimize risk, place a stop-loss slightly below the low of the first candle. This safeguards against unexpected price drops if the reversal doesn’t hold.

Take-Profit: Setting a target based on the next resistance level or using a risk-reward ratio (e.g., 1:2) can help in managing profits.

Example Scenario

Imagine a stock has been trending downwards for several days. You see a large bearish candle on the first day of this pattern. The next day, however, a small bullish candle forms within the body of the first, hinting at buyer interest. On the third day, a strong bullish candle breaks above the highs of the previous two candles. This formation of the 3 Inside Up pattern suggests that buyers are taking over and signals a potential upward move in the stock price.

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Strengthening the Signal

For added reliability, the 3 Inside Up pattern is best used with:

• Support Levels: If the pattern forms near a major support level, the reversal signal is stronger.
• Volume Confirmation: Higher trading volume, especially on the third candle, can indicate strong buying interest.
• Additional Indicators: Using indicators like the RSI (Relative Strength Index) or MACD (Moving Average Convergence Divergence) to confirm that the stock is in an oversold area can also increase confidence in the reversal signal.

Key Takeaways

• The Three Inside Up is a three-candle bullish reversal pattern appearing after a downtrend.
• It requires three candles: a large bearish candle, a small bullish candle inside the first candle’s body, and a strong bullish candle closing above the prior candles.
• It suggests a shift in momentum from sellers to buyers, signaling a potential upward price movement.