The three outside up candlestick pattern is a three-candle bullish reversal pattern that appears at the end of a downtrend, signaling a trend reversal. It forms when a bearish candle is followed by a long bullish candle whose body engulfs it, and then by a second bullish candle that closes higher than the one before.
Traders either buy when the third candle closes, buy on a breakout above the third candle's high, or place the stop loss just below the low of the second candle. Each method is covered step by step below.
What Is a Three Outside Up Candle Pattern?
The three outside up is a bullish reversal pattern made of three consecutive candles. It only counts when it forms after a downtrend, because it shows that the downtrend may be ending and an uptrend may be starting.
The pattern takes three candles to complete. On a daily chart that is three trading days, and on a 4-hour chart it is 12 hours.
The pattern was introduced by Gregory Morris as an extension of the two-candle Bullish Engulfing pattern. The first two candles of a three outside up are a Bullish Engulfing, and Morris added the third candle as confirmation to improve on the two-candle version.
The name comes from the second candle. Its body extends outside the first candle's body at both ends, so the first candle sits fully inside it, and "up" is the direction price is expected to move next.
Several bullish reversal patterns share parts of this structure. The table below shows where they differ.
Each of these patterns has its own guide if you want to compare the rules in more detail.
How Do You Identify the Three Outside Up Candlestick Pattern?
Check the trend first. The three outside up needs a clear downtrend before it, with lower highs and lower lows leading into the first candle. The same three candles in the middle of a sideways range are unreliable as a reversal signal.
The engulf is measured on the candle body, the part between the open and the close. The shadows of either candle do not need to be engulfed, and their length does not affect whether the pattern is valid.
In practice, the second candle opens level with the first candle's close and completes the engulf by closing above the first candle's open. That still counts as a valid three outside up.
Volume on MT4 and MT5 forex charts is tick volume, a count of price changes, because spot forex has no central exchange. Rising tick volume on the second candle is a useful sign that more traders took part in the reversal.
What Is the Psychology Behind the Three Outside Up Pattern?
The first candle closes lower than it opens, showing strong selling pressure as the downtrend continues.
The second candle opens near the first candle's close, then climbs above the first candle's open. This warns the sellers, because a full session of selling has been erased, many traders have taken profits or tightened their stops.
Since sell positions must be closed by buying, this adds to the buying pressure from bulls. This is why the second candle is often long.
The third candle opens and closes higher, and often posts a new high above the second candle. That higher close shows bulls kept control after the reversal, which is the confirmation traders wait for before acting on buy signals.
Three Outside Up vs Three Outside Down: What Is the Difference?
The three outside down is the bearish mirror of the three outside up. It forms after an uptrend with a bullish first candle, a long bearish second candle whose body engulfs the first, and a bearish third candle that closes lower than the second.
Both belong to the same pair of three outside candlestick patterns, and traders apply the same rules in opposite directions. The three outside down has its own guide.
How Do You Trade the Three Outside Up Candlestick Pattern?
A trading setup plan for the three outside up has four parts: confirmation, entry, stop loss and profit target. Each one uses a fixed reference point on the chart.
How Do You Confirm a Three Outside Up Pattern Setup Before Entering?
Look for at least one piece of confirmation from outside the three candles. Good examples are the pattern forming at a known support level, a breakout above a nearby trendline, a breakout with volume spike, RSI turning up from below 30 or all of the above.
Then mark the nearest resistance level above the pattern. It decides whether the trade has room to reach its target, and it is the check that separates the two examples later in this guide.
Where Do You Enter a Three Outside Up Trade?
There are two common entries. The first is to buy when the third candle closes, which gets you in earlier at a lower price.
The second is to wait for the fourth candle and buy only on a breakout above the high of the third candle. This filters out patterns that stall straight away, at the cost of a higher entry price.
A buy stop order above the third candle's high can also fill a few pips higher than its trigger if the breakout happens on a news release or at a session open. That slippage widens the distance to your stop loss.
Where Should You Place the Stop Loss on a Three Outside Up?
Place the stop loss just below the low of the second candle. That low is where bulls took over, so a move below it means the reversal has failed.
Leave a small buffer, such as a few pips on EUR/USD, so a brief spread widening does not trigger the stop.
How Do You Set a Profit Target for a Three Outside Up Trade?
A common target is a 1:2 risk/reward ratio, where the target sits twice as far from entry as the stop loss. Other options are a fixed percentage gain, the nearest resistance level, or holding until the uptrend shows signs of ending.
If the nearest resistance level is closer than your 1:2 target, price is likely to stall there first. Either use the level as your target and accept a smaller reward, or skip the trade.
How Does the Three Outside Up Stop Distance Affect Position Size?
Waiting for the third candle has a cost that is easy to miss. By the time the third candle closes, price is further from the second candle's low, so the stop loss is wider than it would be on a Bullish Engulfing entry at the second candle's close.
A wider stop loss means a smaller position at the same account risk. On a $10,000 account risking 1% ($100), an 81-pip stop allows about 0.12 lots on EUR/USD, while a 59-pip stop allows about 0.17 lots.
You can practise marking the three outside up, placing the stop loss and sizing positions on TMGM's MT4 and MT5 charts with a free demo account before trading live. CFD trading involves significant risk and is not suitable for all investors. You could lose more than your initial deposit.
What Does a Three Outside Up Trade Look Like on EUR/USD?
The two examples below use illustrative prices on a EUR/USD 4-hour chart. The three candles are identical in both, and the only difference is how much room price has before the next resistance level.
The second candle opens at the first candle's close of 1.0820 and closes at 1.0862, above the first candle's open of 1.0845, so its body engulfs the first candle's body. The third candle closes at 1.0884, higher than the second candle.
Example 1: the trade reaches its target. The downtrend started from 1.1120, and the nearest resistance level sits at 1.1060. Entry is at the third candle's close of 1.0884, with the stop loss at 1.0803, 5 pips below the second candle's low, for a stop distance of 81 pips.
The 1:2 target is 162 pips above entry at 1.1046, below the resistance level. Price reaches it over the following sessions, for a gain of $200 on $100 of risk.
Example 2: the trade fails at resistance. The same three candles form, but a resistance level sits at 1.0910, only 26 pips above entry. Price stalls at 1.0910, turns lower and hits the stop loss at 1.0803 for a loss of $100.
The pattern was valid in both examples. What changed the result was the room between entry and the resistance level, which the check in the confirmation step would have flagged before entry.
How Reliable Is the Three Outside Up Candlestick Pattern?
The three outside up has clear rules and appears often on most timeframes, but it can fail even when every candle is valid. Treat it as one piece of evidence and confirm it before trading.
When Does the Three Outside Up Pattern Fail?
Most failures come from where the pattern forms. A three outside up just under a resistance level, or under the lower edge of a recent price gap, has little room before bears step back in.
The second candle matters too. If it is barely longer than the first candle, the takeover by bulls is weak and the reversal often stalls.
The third case is a pattern with no downtrend before it. Inside a sideways range, the same three candles usually mark a swing toward the top of the range, and price tends to turn back at the range high.
When these checks pass, the pattern gives you a fixed stop loss and a measurable target. Position sizing and the stop loss still decide how a series of these trades turns out.
Frequently Asked Questions
What Is an Outside Candle Pattern?
An outside candle, also called an outside bar, is a candle whose high is above the previous candle's high and whose low is below the previous candle's low. The three outside up checks bodies instead of the full range, so its second candle can engulf the first candle's body without being an outside bar, and the pattern is still valid.
Does the Three Outside Up Work in Forex?
Yes. The rules are the same on currency pairs such as EUR/USD and on gold. The one difference is that forex candles usually open at the previous close, so the second candle opens level with the first candle's close and completes the engulf by closing above the first candle's open.
What Timeframe Works Best for the Three Outside Up?
The pattern appears on every timeframe, from 1-minute to monthly charts. Traders mostly use it on 4-hour and daily charts, because each candle covers more trading and short price spikes have less effect on the candle body.
