Direct Answer
A Three Outside Down is a three-bar bearish reversal pattern that appears after an uptrend. It's built on top of a Bearish Engulfing pattern, a long bullish candle followed by a larger bearish candle that fully engulfs it, with a third bar added on top.
Key Takeaways
- Three Outside Down is a three-bar bearish reversal pattern that appears after an uptrend.
- The first two bars form a Bearish Engulfing pattern: a long bullish candle followed by a larger bearish candle that fully engulfs it.
- The third bar is a required confirming bar that closes lower than the second bar's close.
- Because confirmation is already built into the pattern, Three Outside Down is considered a more complete signal than a bare Bearish Engulfing on its own.
- A bare two-bar Bearish Engulfing pattern is not the same thing as Three Outside Down, the third confirming bar is what defines this pattern.
Three Outside Down Candlestick Pattern: Formation, Meaning, and Signals
A Three Outside Down is a three-bar bearish reversal pattern that appears after an uptrend: a Bearish Engulfing pattern followed by a third bar that confirms the reversal by closing lower than the second bar's close. Because that confirmation is built into the pattern's definition, it's read as a more complete signal than a Bearish Engulfing pattern on its own.
What Is a Three Outside Down?
A Three Outside Down is a three-bar bearish reversal pattern that appears after an uptrend. It's built on top of a Bearish Engulfing pattern, a long bullish candle followed by a larger bearish candle that fully engulfs it, with a third bar added on top. That third bar confirms the reversal by closing lower than the second bar's close.
The name describes its structure: the pattern is built from an "outside" two-bar shape (the engulfing pair, where the second bar's range sits outside the first) plus a third bar that continues the move down. Unlike a single-bar pattern, all three bars have to align in sequence for the pattern to be complete.
How a Three Outside Down Forms
The pattern forms in a fixed three-bar sequence, always following an uptrend:
- Bar 1: a long bullish candle, continuing the prevailing uptrend.
- Bar 2: a larger bearish candle that fully engulfs Bar 1's body, together, Bars 1 and 2 form a Bearish Engulfing pattern.
- Bar 3: a confirming bar that closes lower than Bar 2's close, completing the Three Outside Down.
All three bars have to appear in this order for the pattern to qualify. Stopping the count at two bars leaves a bare Bearish Engulfing pattern, not a Three Outside Down.
Three Outside Down Example
The chart below shows a deterministic, illustrative example: an uptrend leading in, the three pattern bars forming, then two possible continuations, a confirmation (price follows through lower) and a failure/look-alike (price recovers instead). Toggle between them to see why the pattern's third bar matters.
How to Trade a Three Outside Down
Treat confirmation as already included
Because confirmation is already part of the pattern, Three Outside Down is considered a more complete signal than a bare Bearish Engulfing on its own. Where a Bearish Engulfing pattern typically needs a later bar to validate the reversal before it's actionable, the Three Outside Down's third bar has already done that work as part of its definition.
Confirm the count, not just the shape
Before treating a setup as a Three Outside Down, confirm all three bars are present in the correct order, a long bullish candle, a larger engulfing bearish candle, and a confirming close lower than the second bar's close. A chart that only shows the first two bars is a Bearish Engulfing pattern, not a Three Outside Down.
Read it in the context of the prior uptrend
The pattern is a reversal signal specifically because it interrupts an uptrend. The same three-bar shape carries less meaning without a preceding uptrend to reverse, so trend context is part of identifying the pattern, not a separate optional check.
Common Three Outside Down Mistakes
- Treating a Bearish Engulfing pattern as equivalent to Three Outside Down, the Engulfing pattern alone lacks the confirming third-bar close that Three Outside Down requires.
- Stopping the count at two bars instead of three, the pattern isn't complete until the confirming bar closes lower than the second bar's close.
- Ignoring whether an uptrend actually preceded the pattern, without a prior uptrend to reverse, the same three-bar shape doesn't carry the same signal.
- Assuming the third bar's confirmation guarantees further downside, the pattern confirms the reversal signal itself, not how far or how long any resulting move continues.
Three Outside Down vs. Similar Patterns
| Pattern | Bar count | Key difference from a Three Outside Down |
|---|---|---|
| Three Outside Down | 3 | Baseline, Bearish Engulfing plus a confirming third bar closing lower |
| Bearish Engulfing | 2 | Just the first two bars; no confirming third-bar close built in |
| Three Inside Down | 3 | Built on a Bearish Harami instead of a Bearish Engulfing as the base two-bar shape |
Limitations of the Three Outside Down Pattern
A Three Outside Down describes the relationship between three bars' opens, closes, and ranges, it doesn't carry information about volume, order flow, or the reasons behind the move. Confirming the third bar's close reduces (but doesn't eliminate) the risk of acting on a false signal, and the pattern says nothing about how large or how long any subsequent move will be. Like any candlestick pattern, it works best read alongside trend context and a defined risk plan, not treated as a standalone trading rule.
Two Thresholds, Both Worth Measuring
This pattern contains two separate quantitative checks and the definition treats both as binary. The second bar body has to engulf the first, and how comfortably it does so is the difference between a decisive instance and a marginal one. The third bar has to close below the second bar close, and how far below is a second measure of conviction. A pattern that qualifies twice by a hair is not the same evidence as one that clears both comfortably.
Measuring rather than eyeballing takes a moment and changes what you conclude, particularly on charts where bar sizes are similar and a marginal engulf is easy to read as a decisive one.
The engulfing convention applies as usual: real bodies only, with wicks excluded from the comparison. A visually dramatic second bar with long shadows may not qualify at all, and a modest-looking one may.
Since the confirming bar is built into the definition, the pattern is late by construction, and the natural invalidation, its own high, sits well above a third-bar entry. That distance is the position-sizing input rather than a detail.
Three Outside Down FAQs
Is Three Outside Down the same as Bearish Engulfing?
No. A Bearish Engulfing pattern is only the first two bars, a long bullish candle followed by a larger bearish candle that fully engulfs it. Three Outside Down adds a required third bar that closes lower than the second bar's close, which the Bearish Engulfing pattern alone does not include.
How many bars make up a Three Outside Down pattern?
Three. The first two bars form a Bearish Engulfing pattern, and the third bar confirms it by closing lower than the second bar's close. Stopping the count at two bars means you're looking at a Bearish Engulfing, not a Three Outside Down.
Why is Three Outside Down considered more reliable than Bearish Engulfing alone?
Because confirmation is already built into the pattern. A bare Bearish Engulfing pattern still needs a later bar to confirm the reversal before it's actionable; Three Outside Down already includes that confirming close as part of its definition, making it a more complete signal.
What's the difference between Three Outside Down and Three Inside Down?
They're built on different two-bar bases. Three Outside Down is a Bearish Engulfing pattern plus a confirming third bar. Three Inside Down is built on a Bearish Harami, where the second candle's body sits inside the first, rather than engulfing it, plus its own confirming third bar.
Does Three Outside Down need to appear after an uptrend?
Yes. As a bearish reversal pattern, Three Outside Down is only meaningful when it appears after an uptrend, where it signals that the prior upward move may be reversing. The same three-bar shape appearing without a prior uptrend doesn't carry the same reversal implication.
Which of the three bars is the engulfing bar?
The second. The first is the smaller bar being engulfed, the second is the bearish candle covering its body, and the third confirms by closing lower still. Describing the pattern as three bars can obscure that the substance is a two-bar engulfing with a confirmation attached, which is what distinguishes it from the bare engulfing pattern.
Does the third candle have to close below the engulfing candle low?
Implementations differ. The strict version requires a close beneath the entire second candle, which is a demanding condition after an already large bar. The loose version requires only a lower close than the second candle. The strict one confirms far less often, which is the usual tradeoff between confirmation strength and how many instances survive.
Does the pattern require a gap anywhere?
No, which distinguishes it from most of the star family and makes it computable on intraday charts and in continuously traded markets. The engulfing relationship and the confirming close are both comparisons between adjacent bars. That absence of a gap condition is one reason three outside patterns are among the more consistently implemented in the catalogue.
Can three outside down form at the start of a decline rather than the end of an advance?
The geometry can form anywhere, and the reversal reading requires a preceding advance. Appearing early in a decline the same three bars describe continuation, which is a different claim. Since the pattern itself contains a bearish engulfing and a lower close, it looks convincing in either location, and only the trend criterion separates them.
References
- CMT Association: Technical Analysis Body of Knowledge and Research
- CFA Institute Research and Policy Center: Investment Research
- Steve Nison, Japanese Candlestick Charting Techniques (1991), the book credited with popularizing Japanese candlestick analysis in Western markets.
- SEC Investor.gov: Introduction to Investing