Candlestick patterns are used to determine the best moment to enter the market. There are many different ones and it is a good idea to have an understanding of when and why they appear. Today, we will talk about the pattern that is a signal of the trend reversal. It is called the Three Inside Candlestick pattern.
The three inside up and down patterns
The name of the pattern comes from the number of candlesticks that create a formation. There are three consecutive candles which are giving information about a loss of the current trend’s momentum. At the same time, the movement in the opposite direction is expected.
The three inside formation is rather a short-term pattern and so the change in the price direction is often minor. But the pattern can be used in the context of the general trend.
The three inside up pattern
The three inside up pattern develops at the bottom of the downtrend. It signals the price will soon begin to rise.
In the three inside up pattern, the first candle is large and bearish. The second one is small, bullish,, and engulfed by the first one. The last candle in the formation is also bullish and its closing lies above the second candle’s closing and above the first candle’s opening.
The three inside down pattern
The three inside down patterns can be found during the uptrend. It announces the end of the up movement and an imminent fall in the prices.
The first candle in the three inside down pattern is long and bullish. Next, comes a small bearish candle that is developed within the first candle. The third candle is bearish and it closes below the middle candle’s closing and below the first candle opening.
Using the three inside up/down pattern in trading
The three inside candlesticks pattern can be merely used as information of the upcoming change in the direction of the price. This change, most probably, will be quite short. However, it is also possible to open a trading position with the use of the three inside up or down patterns.
Opening an up position with the three inside up pattern
The three inside up pattern is a bullish formation. It appears when the downtrend comes to an end and the trend is about to reverse.
You should enter a long trade near the close of the third candle in the pattern or at the beginning of the first candle that appears just after the three candles in the pattern.
If you trade currency pairs (CFD) you can set a stop loss below the first, second,, or third candle in the pattern. It will depend on the risk you are ready to take. For fixed time trades use duration which is at least 3 times higher than the chart time frame.
Opening a down position with the three inside down pattern
In the opposition, the three inside down patterns can be noticed on the top of the uptrend. This is a bearish pattern that gives a signal about the price decrease.
Enter a short trade near the third candle closing or at the opening of the first candle that is just about to develop after the formation.
With CFDs (currency pairs) place a stop loss above the first, second,, or third candle’s high, depending on the risk you are prepared to take. If you want to use this pattern trading fixed time trades, set the duration to be at least 3 times higher than the time frame of the chart on which you recognized the three inside patterns.
The pattern described today is created by three subsequent candles. It usually signals a minor change in the trend.
There is a three inside up pattern which is a bullish formation, and a three inside down pattern which is a bearish one.
To determine when to exit the trade, you can use another method such as a trailing stop loss, technical indicators, another candlestick pattern,, or exit at a predefined risk/reward ratio.
Get familiar with the three inside up and down patterns on the Olymp Trade demo account. This is a free account that perfectly serves practice purposes. There is no limit of time you can use it. Plus, there is no real money involved so even if you lose, you’ll only deplete your virtual account balance, making it risk-free.
That is why train in a demo account, learn to recognize the pattern,, and then move to the live Olymp Trade account. Although, keep in mind that you have to be extremely careful in the real account, as knowing this candlestick pattern doesn’t guarantee you any profits. You must be prepared to face losses when trading in the market.
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