When diving deeper into reading Japanese candlesticks, we notice that some formations may look similar in shape, yet differ greatly in strength and significance. Among the powerful patterns that do not require additional confirmation from subsequent candles stands the Triple Outside Candlestick Pattern, considered one of the most prominent reversal formations in price action.
In this article, we will discuss:
- What are the essential conditions for this pattern to form?
- In which market areas does it tend to be most effective?
- What is the psychology and price behavior behind its formation?
- And how can it be practically applied in trading?
Three Outside up :
This pattern consists of three consecutive candles with a clear reversal nature:
- First candle: A bearish candle with a small body, reflecting the continuation of the downtrend but with weakening momentum.
- Second candle: Opens below the body of the first candle and then closes completely above its body, signaling absorption of selling pressure and the emergence of strong buying interest.
- Third candle (the most important): A strong bullish candle that must close above the closing price of the second candle, confirming the shift in control in favor of buyers.
This pattern typically forms near support zones, indicating the potential end of the downward move and the beginning of a new upward wave due to a shift in the balance of power within the market.
The psychology behind its formation:
As the bearish wave approaches its end, a small-bodied candle begins to form, signaling weakening selling momentum and reduced control from sellers.
It is then followed by a second candle that completely engulfs the first one, reflecting strong buyer participation. Buyers manage to absorb the selling pressure and push the price to close above the body of the first candle.
The third candle confirms the full shift in control, as buyers take dominance over the movement and the trend starts transitioning from bearish to bullish. This is validated by the third candle closing above the closing price of the second candle.
How do we trade using this pattern?
When the pattern appears near a support area, especially within an overall uptrend, a buy position can be considered immediately after the third candle closes.
Stop loss is placed below the lowest point of the pattern, meaning below the three candles.
Take profit is typically set with a 1:3 risk to reward ratio, so the target equals three times the stop loss distance.This method combines clear entry rules with disciplined risk management to capitalize on a potential trend reversal.
How do we trade using this pattern?
When this pattern forms at a support zone, and within the context of an overall uptrend for example, a buy position can be considered immediately after the three candles are completed.
The stop loss is placed directly below the pattern, meaning below the lowest low of the three candles, to protect the trade in case the signal fails.
As for the targets, they are determined according to disciplined risk management, where the expected reward equals three times the stop loss distance, as typically illustrated on the chart
