Understanding the Three Outside Down

What is the Three Outside Down?

The Three Outside Down is a bearish reversal pattern that signals a potential change from an uptrend to a downtrend. It consists of three candles: two bullish candles followed by a bearish candle that completely engulfs the previous two candles. This pattern indicates that selling pressure may be overwhelming, suggesting a possible trend reversal.

How is the Three Outside Down Identified?

The Three Outside Down pattern is identified by:

1. Two Bullish Candles: Two consecutive bullish candles with increasing closes.
2. Bearish Engulfing Candle: The third candle is bearish and engulfs the body of the previous two bullish candles.

When to Use the Three Outside Down

The Three Outside Down pattern is used to:

• Identify Potential Bearish Reversals: Spot potential changes from bullish to bearish trends.
• Assess Reversal Strength: Evaluate the strength of the reversal based on the engulfing candle.
• Adapt Trading Strategies: Modify trading strategies to take advantage of the potential downtrend.

Formula Example

To identify the Three Outside Down pattern:

1. Two Bullish Candles: Look for two consecutive bullish candles.
2. Bearish Engulfing Candle: Find a third candle that opens above the high of the previous bullish candles and closes below the low of the previous bullish candles.

For example:

• If two consecutive bullish candles are followed by a bearish candle that closes below the low of the previous bullish candles, it may signal a bearish reversal.

Parameters

The parameters for identifying the Three Outside 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 Outside Down pattern in the last N candles.

Conclusion

The Three Outside Down pattern is a significant bearish reversal signal that can help traders identify potential shifts from an uptrend to a downtrend. Recognizing this pattern allows traders to make informed decisions based on potential bearish market conditions.