Three Outside Up Candlestick Pattern
Swing trading is a popular trading strategy that involves holding a position for several days or weeks to capture short-term price movements in the market. One of the most important tools in a swing trader’s arsenal is the candlestick chart, which displays an asset’s open, high, low, and close prices over a specific period. Candlestick patterns can provide valuable information about the market’s direction, and one such pattern is the Three Outside Up.
This article will discuss the Three Outside Up pattern in detail, including its definition, characteristics, and how to use it for swing trading. We will also provide examples of this pattern and highlight its strengths and weaknesses.
What is the Three Outside Up Candlestick Pattern?
The Three Outside Up is a bullish reversal pattern that consists of three candles. It is formed when a long red candle is followed by two long green candles, with the second candle completely engulfing the first candle. The second candle should also close above the first candle’s high, while the third candle should close higher than the second candle’s high.
The Three Outside Up candlestick pattern indicates that the market has reversed from a bearish trend to a bullish trend. The first candle represents a downtrend, with sellers controlling the market. However, the second candle signals a change in sentiment, with buyers entering the market and overpowering the sellers. The third candle confirms the reversal, with buyers pushing the price higher.
Characteristics of the Three Outside Up
To identify the Three Outside Up pattern, you should look for the following characteristics:
- The pattern consists of three candles. The first candle is long and red, while the second and third candles are long and green.
- The second candle completely engulfs the first candle, indicating a significant shift in sentiment.
- The second candle should close above the first candle’s high, indicating that buyers have taken control of the market.
- The third candle should close higher than the second candle’s high, confirming the bullish reversal.
- The pattern is more reliable when it occurs after a downtrend.
How to Use the Signal for Swing Trading
The Three Outside Up can be used in swing trading to identify potential bullish reversals and enter long positions. Here are the steps to use the Three Outside Up candlestick pattern for swing trading:
- Identify the Three Outside Up on the candlestick chart. Look for a long red candle followed by two long green candles, with the second candle completely engulfing the first candle.
- Confirm the pattern by checking that the second candle closed above the first candle’s high and the third candle closed higher than the second candle’s high.
- Wait for a confirmation signal. The confirmation signal can be a higher high or a bullish candlestick pattern that occurs after the Three Outside Up pattern.
- Enter a long position at the open of the next candle after the confirmation signal. Set your stop loss below the low of the Three Outside Up pattern.
- Take profit at a predetermined level or trail your stop loss to capture more profits if the market continues to move in your favor.
Strengths and Weaknesses of the Three Outside Up Pattern
Like any trading strategy, the Three Outside Up candlestick pattern has its strengths and weaknesses. Here are some of the advantages and disadvantages of this pattern:
Strengths:
- The Three Outside Up is a strong bullish reversal pattern that can provide a reliable signal for swing traders.
- The pattern is easy to identify on the candlestick chart, making it accessible to traders of all levels.
- The pattern provides clear entry and exit points, with the confirmation signal and stop loss placement.
- The pattern can be used in combination with other technical indicators and trading strategies to increase its effectiveness.
Weaknesses:
- The Three Outside Up pattern is a rare pattern that may not occur frequently, limiting its use in swing trading.
- The pattern may fail to provide a reliable signal in volatile markets or when there is significant news or events affecting the market.
- The pattern may result in false signals, leading to losses for traders who enter positions based on the pattern.
- The pattern does not provide information on the size of the potential move, limiting its usefulness in setting profit targets.
Bottom Line
The Three Outside Up candlestick pattern is a bullish reversal pattern that can be useful for swing traders looking to identify potential trend reversals and enter long positions. The pattern is easy to identify on the candlestick chart and provides clear entry and exit points. However, traders should be aware of the pattern’s weaknesses, such as its rarity, potential for false signals, and limited information on the size of the potential move.
As with any trading strategy, it is important to use proper risk management and position sizing when using the Three Outside Up for swing trading. But it should be used in conjunction with other analyses and should not be relied upon as the sole basis for trading decisions.
