Candlestick patterns are the language of price action, and among them, the Three Inside Down pattern is a powerful bearish reversal signal that traders use to catch trend changes early. Whether you’re a beginner or an experienced trader looking to refine your edge, understanding how to spot, confirm, and trade this pattern can significantly improve your decision-making.
In this post, we’ll cover:
- What is the Three Inside Down pattern?
- How to identify it accurately
- Backed-up strategies to trade it effectively
- Real market scenarios and examples
- Risk management techniques
🔍 What is the Three Inside Down Pattern?
The Three Inside Down is a bearish reversal candlestick pattern that typically appears at the end of an uptrend. It signals that the bullish momentum is weakening and bears are starting to gain control.
Structure of the Pattern:
- First Candle: A long bullish (green) candle continuing the current uptrend.
- Second Candle: A smaller bearish (red) candle that forms within the body of the first candle – this shows hesitation.
- Third Candle: A strong bearish candle that closes below the low of the first candle – confirming the bearish shift.
Think of it like a bullish party that slowly gets overpowered by bears crashing in.
📌 How to Identify a Valid Three Inside Down Pattern
Use this checklist:
- An uptrend must be present.
- The second candle must be fully engulfed within the first candle.
- The third candle must close below the first candle’s low.
- Volume spike on the third candle can increase reliability.
🎯 Best Strategies to Trade the Three Inside Down Pattern
Let’s go over multiple strategies you can use, from beginner-friendly setups to more advanced plays involving indicators.
✅ Strategy 1: Classic Reversal Entry
This is the most straightforward way to trade the pattern.
Entry:
- Enter short after the third candle closes below the first candle’s low.
Stop Loss:
- Place SL above the high of the first candle.
Target:
- Aim for 1.5x to 2x risk-to-reward, or the next support level.
Example:
- Stock XYZ is in a 10-day uptrend.
- A Three Inside Down forms at resistance.
- You short at ₹102.
- SL is ₹106 (above the first candle).
- Target is ₹94 to ₹98 (support zone).
✅ Strategy 2: Pattern + Moving Averages (Confluence)
Combine the Three Inside Down with a 50 EMA or 200 EMA.
Setup:
- Pattern forms below or at a resistance near the EMA.
- If the price closes below the EMA after the third candle, it adds confirmation.
Entry:
- Enter short when the third candle closes below both the EMA and pattern low.
Stop Loss:
- Above pattern high or EMA.
Target:
- Use the next swing low or Fibonacci retracement level.
Example:
In NIFTY50, a Three Inside Down forms near the 200 EMA. Third candle breaks below both the EMA and pattern. You short and ride the next 2% fall.
✅ Strategy 3: RSI Divergence + Three Inside Down
This is for advanced traders who use oscillators.
Setup:
- Look for RSI bearish divergence (price makes higher highs, RSI makes lower highs).
- Then, spot a Three Inside Down at that second peak.
Entry:
- Short after the third candle closes.
Stop Loss:
- Above pattern high.
Target:
- Use divergence target or previous support.
Why it works:
This setup catches early momentum fades, and the pattern confirms the reversal.
✅ Strategy 4: Volume Confirmation Filter
Volume adds weight to the pattern’s significance.
Setup:
- First candle: normal volume.
- Second candle: low volume (indecision).
- Third candle: high volume (bearish breakout).
Entry:
- Enter short after volume spike on the third candle.
Stop Loss:
- High of the first candle.
Target:
- 2:1 R:R or dynamic support levels.
✅ Strategy 5: Multi-Time Frame Confirmation
Use higher timeframes for trend context and lower for precise entries.
Steps:
- Identify Three Inside Down on Daily chart.
- Drop to Hourly chart and wait for a breakdown.
- Enter after confirmation on smaller timeframes.
Why use this?
This strategy improves entry precision and reduces false signals.
📊 Real Chart Example (Explained)
Imagine Infosys Ltd. trading at ₹1,500 and has been in a 15% uptrend. On the daily chart:
- Day 1: Bullish candle closes at ₹1,520.
- Day 2: Small red candle forms inside previous day’s body, closes at ₹1,510.
- Day 3: Big red candle breaks ₹1,500 and closes at ₹1,480.
Trade Setup:
- Entry at ₹1,495.
- SL at ₹1,525.
- Target at ₹1,440 (previous swing low).
Within 5 days, the stock hits ₹1,440.
🛡️ Risk Management Tips
- Never risk more than 1-2% of your capital on a single trade.
- Avoid trading it in a strong bullish trend unless confirmed with other indicators.
- Always combine candlestick patterns with support/resistance, volume, or indicators.
- Backtest strategies on historical charts before going live.
⚠️ When the Pattern Fails
Even reliable patterns fail. Watch out for:
- False breakdowns
- News-driven volatility
- Thinly traded stocks
Always have a stop-loss and trade plan in place.
🧠 Final Thoughts
The Three Inside Down is a reliable candlestick pattern when used in the right context. It becomes more powerful when supported by confluence factors like resistance, volume, RSI divergence, or moving averages. Like all technical tools, it’s not foolproof – but with proper risk control and disciplined execution, it can give you a strong edge in bearish reversal setups.
💬 Want to practice?
Try spotting this pattern on historical charts and combine it with one of the above strategies. You’ll start seeing how often market sentiment shifts are telegraphed before they happen.