Three Inside Down

What Is Three Inside Down?

Three inside down refers to a candlestick pattern that appears in a financial instrument’s price chart following an uptrend. It indicates a bearish reversal, helping traders set their entry or exit points. Moreover, it provides individuals with valuable insights concerning market sentiment.

The pattern consists of three candlesticks — a long green or bullish candlestick, a smaller red or bearish candle within the first (bullish) candlestick, and another bearish candlestick closing under the second (bearish) candle. This pattern appears because the bulls or buyers lose their dominating position to the bears or sellers. The pattern’s distinct features make it easily identifiable by traders.

• Three inside down candlestick pattern refers to a three-candlestick chart pattern that traders utilize to conduct technical analysis as this indicates a bearish reversal.
• A noteworthy advantage of this candlestick pattern is that even people new to trading can easily identify it.
• There are multiple limitations to this pattern. For example, it may give false signals. Also, the reversal indicated by it might not be that significant.
• Traders need to consider entering or exiting their position only after the confirmation candlestick, i.e., the third candlestick appears in the price chart.

Three Inside Down Pattern Explained

Three inside down candlestick pattern refers to a chart formation in technical analysis requiring three individual candlesticks to appear in a particular sequence. It signals a shift in the market sentiment. Traders can utilize this candle to predict forthcoming bearish trend reversals. Typically, they change their strategy upon observing this pattern to maximize their gains in the market. One often considers entering a short position when they see this pattern in a security’s price chart.

The colors of the candlesticks in such a pattern provide traders with vital information regarding a financial asset’s price action. Such colors give them an idea of how the price is fluctuating, which, in turn, enables the traders to evaluate the market environment’s volatility. This pattern appears quite frequently in a financial instrument’s price chart. As noted above, one spots them after a bullish trend.

Formation

The formation of such a pattern in a price chart requires the fulfillment of specific conditions. For example, it must come after an established trend, signaling a shift in the market sentiment.

At the beginning of the pattern, the first or green candlestick denotes that the bulls or buyers in the market are in control. The second candlestick represents an alteration concerning the market sentiment because it closes under the preceding candlestick. In fact, as noted above, the second candlestick is contained within the first candle’s range, showing a pause or interruption in the trend. Following this second (bearish) candlestick, sellers start gaining more control than the buyers. Note that the third candle in the sequence closes below the two prior candlesticks. Moreover, it serves as a confirmation of the forthcoming reversal in trend.

How To Read?

Let us look at a TradingView chart below to understand how to read and interpret this chart pattern.

Source

In the above 1-hour Bitcoin/Tether chart, we can see that after a bullish trend for a very short duration, the formation of a three inside down candlestick pattern took place over a 2-hour period.

The first candle in the three-candle sequence is long, marking buyers’ strong grip on the market. That said, the small bearish candle after the first candlestick shows that the bears exerted selling pressure in the trading session. As a result, the close was below the first bullish candle’s close. The third candle, which is also a bearish one, closes below both the previous candles at around $3979.78, denoting a further increase in selling pressure.

Moreover, the significant downside move represented by the third candlestick serves as a confirmation of the reversal in trend. That said, as one can observe in the chart, the price level did not drop further following the pattern’s formation.

How To Trade?

Let us look at a few steps that individuals need to take to trade this pattern.

1. Pattern Identification And Confirmation: Traders must look for the specific features of the triple candlestick pattern to identify it. Note that one must wait for the confirmation candlestick before taking any action. Taking partial positions during the formation can increase the chance of losses.
2. Stop-Loss Placement: People must place a stop-loss order to limit the losses. The placement of the stop loss depends on one’s risk appetite.
3. Take Profits: Traders can utilize strategies like short selling to generate financial gains through the utilization of this pattern. Individuals can enter short positions in financial assets at the start of a candle following the third one or at the third candlestick’s end.

People must not consider this pattern in isolation when trading. They must consider using it with market analysis, risk management methods, and other chart patterns as well as indicators to develop an effective and detailed trading strategy. Also, one needs to track the market constantly to be aware of the trends and sentiment. This will in turn, help measure the accuracy of the pattern’s signals. 

Examples

Let us look at a few three inside down examples to understand the concept better.

Example #1

Suppose Jim is a trader who primarily engages in buying and selling stocks for a profit. ABC Stock was on his watchlist for over 2 months. He observed the formation of a three inside down pattern in the security’s price chart after an uptrend. After the confirmation candlestick appeared, he placed a short sell order at the close of the third candle. His decision was correct as the price plunged 20%. Jim could earn a profit of $80 because of being able to predict the trend reversal and take a position early. 

Example #2

Suppose Travis had entered a long position in XYZ Stock 3 days before with the aim of taking advantage of the uptrend and making financial gains. That said, he saw that there was a possibility of the three inside down candlestick pattern’s formation when he spotted a long bullish candle followed by a bearish candle contained within the former’s range.

He did not exit his position, hoping that the bulls would regain control and drive the price upward. However, the confirmation candlestick appeared with a close below the bullish candle in the sequence. Thus, Travis exited his position at the close to limit his losses. The decision was correct as a bearish reversal materialized.

Advantages And Disadvantages

Let us look at the benefits and limitations of three inside down candlestick patterns.

Advantages

• This pattern helps traders make buy or sell decisions to fulfill their investment objectives.
• One can utilize this pattern in different timeframes, for example, daily, weekly, and intraday.
• Even novice traders can easily identify this pattern because of its specific features.
• One can utilize this pattern with other chart patterns and indicators to formulate an effective trading strategy.

Disadvantages

• These patterns are not always reliable because they appear frequently in a price chart.
• The reversal indicated by this pattern can be very small or insignificant. As a result, it may not have much of an impact on traders.

Frequently Asked Questions (FAQs)

Recommended Articles

This has been a guide to what is Three Inside Down. Here, we explain its formation, how to read and trade it, examples, advantages, and disadvantages. You can learn more about it from the following articles –

• Triple Top Pattern
• Fractal Adaptive Moving Average
• Bullish Engulfing Pattern