Understanding the Three Inside Down

What is the Three Inside Down?

The Three Inside Down is a bearish reversal pattern that signals a potential change from an uptrend to a downtrend. It consists of three candlesticks: a bullish candle, followed by a smaller candle contained within the body of the first, and then a bearish candle that closes below the low of the first candle. This pattern indicates increasing bearish sentiment and a potential reversal of the previous uptrend.

How is the Three Inside Down Identified?

The Three Inside Down pattern is identified by:

1. Bullish Candle: The first candlestick is a long bullish candle.
2. Inside Candle: The second candle is a smaller bullish or bearish candle that is completely within the body of the first candle.
3. Bearish Confirmation: The third candle is a bearish candle that closes below the low of the first candle.

When to Use the Three Inside Down

The Three Inside Down pattern is used to:

• Identify Bearish Reversals: Spot potential market reversals from an uptrend to a downtrend.
• Assess Market Sentiment: Determine if the market sentiment is shifting towards bearishness.
• Adjust Trading Strategies: Modify trading strategies to take advantage of potential downtrends.

Formula Example

To identify the Three Inside Down pattern:

1. Bullish Candle: Find a long bullish candlestick.
2. Inside Candle: Locate a smaller candle within the body of the bullish candle.
3. Bearish Confirmation: Identify a bearish candle that closes below the low of the bullish candle.

For example:

• If the market has been in an uptrend and a Three Inside Down pattern forms, it may indicate the start of a downtrend.

Parameters

The parameters for identifying the Three Inside Down pattern include:

• Data: Defines the type of data to use for the pattern.

  • Value: ohlc
  • Description: The pattern uses Open, High, Low, and Close prices.

• Previous N Candles: Number of preceding candles to check.

  • Default Value: 1
  • Min Value: 1
  • Max Value: 300
  • Description: Checks for the Three Inside Down pattern in the last N candles.

Conclusion

The Three Inside Down pattern is a significant bearish reversal signal that suggests a potential shift from an uptrend to a downtrend. By identifying this pattern, traders can adapt their strategies to capitalize on possible bearish movements in the market.