Candlestick patternsThree Outside Up
A bullish engulfing with a confirming third up-candle — a validated bottom reversal.
Works best in trending marketsEngine-computed on a fixed sample series
What it is
Three Outside Up is the bullish mirror of Three Outside Down: a three-candle reversal that appears at the bottom of a downtrend and signals that sellers have yielded to buyers. The name again refers to the middle bar, an outside candle that engulfs the one before it — here a bullish engulfing that wraps a red candle inside a larger green body. It answers the beginner's question at the end of a decline: is this bounce just a dead-cat pop, or a real bottom worth buying? The pattern is the confirmed, three-bar version of the standalone bullish engulfing, adding a third up-candle as proof. That extra candle is what separates a durable turn from a one-bar spike that fades. Traders prize it because the confirmation is baked in rather than something you have to guess at.
How it forms, candle by candle
The first candle is a down-candle consistent with the existing downtrend, closing below its open. The second candle opens at or below the first candle's close, then rallies with force to close at or above the first candle's open, so its green body completely engulfs the prior red body — the bullish engulfing, the outside bar. The third candle extends the move, closing above the second candle's close and thereby confirming that buyers followed through rather than fading. As with its bearish twin there is no formula, only the relationship of opens and closes across three bars. The engulfing candle captures the moment demand overwhelmed supply in a single session, and the third candle proves the demand persisted. A large engulfing body closing near its high, followed by a strong third close, is the ideal expression.
Reading it step by step
First verify a genuine preceding downtrend or a flush into support, because without one there is no bottom to form. Then assess the engulfing candle: a big green body that closes near its high and dwarfs the prior red candle shows aggressive buying, while a marginal wrap is unconvincing. Look at the third candle next — a solid up-close above the engulfing high is strong, whereas a bar that barely rises or leaves a long upper wick suggests buyers are already running out of steam. Rising volume on the engulfing and third candles is a meaningful tell that real accumulation, not a thin short-covering pop, is driving the move. Read together, the three bars describe control passing decisively from bears to bulls. Missing pieces — no prior downtrend, a feeble engulfing, a weak third bar — should lower your confidence proportionally.
Best timeframes and recognition settings
Higher timeframes rule here as well: daily and weekly patterns carry the weight of full sessions and produce far fewer false bottoms than the endless engulfing shapes that appear on 1- and 5-minute charts. Swing and position traders are the natural audience; intraday traders should demote it to a supporting cue. Your key setting is how strictly you define the engulfing — body-only versus body-plus-wicks — and requiring the engulfing body to exceed the recent average body size filters out trivial wraps. A stricter definition gives fewer, cleaner signals; a looser one gives more signals and more noise. Some traders also require the third candle to close above the engulfing candle's high, not merely above its close, which raises the bar for confirmation. Match the strictness to your tolerance for missed trades versus false starts.
When and where to use it
Use it in trending conditions when a clear downtrend reaches a floor — prior support, a round number, a long-term moving average, or a measured-move target — and stalls. In a directionless range it means little, since bounces off the range low happen routinely and an engulfing there is just noise. It applies across stocks, indices, forex, and crypto, with the same caveat that 24-hour markets have less meaningful daily opens and closes. Avoid buying it in the teeth of a fast, accelerating downtrend that shows no exhaustion, where a single engulfing is more often a bull trap than a bottom. The strongest instances form where price is already stretched to the downside and arrives at a level that independently matters. Pairing the shape with an oversold backdrop dramatically improves the odds.
Strategies that use it
The core play is a confirmation long: buy on or just after the third candle's close, set a stop just below the engulfing candle's low, and target the nearest resistance or a measured move equal to the prior swing. A patient variant waits for the common pullback toward the engulfing candle's low and buys that successful retest, earning a tighter stop and a cleaner reward-to-risk. A third use is as a re-entry or cover signal for shorts: when the pattern prints at support while you are short, you cover and step aside rather than riding the reversal down into a loss. Across all variants the engulfing candle's low is the invalidation — a close beneath it says the bulls failed and the setup is void. Position size off that low so a stop-out is a small, predefined cost.
Combining it with other indicators
Anchor the pattern to support you identified independently, so the reversal has a structural reason. Bullish momentum divergence is a strong ally: if RSI or MACD carved higher lows while price made a lower low, the Three Outside Up confirms the strength the oscillator was foreshadowing. RSI curling up out of oversold, or a bullish MACD crossover on the same bars, adds weight. Volume expanding on the engulfing candle points to genuine accumulation rather than a thin squeeze. The pattern forming at a reclaimed moving average — price snapping back above a 50- or 200-period line — turns a candlestick cue into a trend-following entry that many systematic traders respect. Fibonacci retracement levels and prior demand zones make especially reliable backdrops.
Where it fails
The most common failure is the absence of a real downtrend, leaving nothing to reverse and reducing the pattern to range noise. Chasing is the second pitfall: by confirmation the move has already run three bars, so a late buy near the top of the pop invites a pullback straight through your stop. A weak third candle — a small rise or a long upper wick — is a frequent false positive, the wick betraying sellers still leaning on the level. In powerful bear trends these bottoms print and fail again and again as rallies get sold, so distrust an isolated signal fighting a strong downtrend. Guard against all of this by insisting on a prior trend, a convincing engulfing, supportive volume, and a meaningful location, and by anchoring your stop to the engulfing low rather than a far-off level that bloats your risk.
A worked example
Suppose a stock slides from 90 to 61 and reaches a well-tested support shelf at 60. Day one is a red candle: open 63.20, close 61.40, in keeping with the downtrend. Day two opens at 61.00, buyers seize control, and it closes at 64.10 — its body from 61.00 up to 64.10 fully engulfs day one's 61.40-to-63.20 body, on the strongest volume in weeks. Day three opens at 64.30 and closes at 65.80, above the engulfing close, completing the pattern. You buy at 65.80 with a stop at 60.80, just below the engulfing low, risking about 5.00 per share. Your first target is prior resistance at 74, a potential reward near 8.20 against 5.00 for a reward-to-risk close to 1.6, and you scale out into strength while trailing your stop up behind each higher swing low.