Candlestick patterns are vital tools for traders aiming to understand price action and market sentiment. One powerful but often overlooked bullish reversal pattern is the Three Inside Up pattern. Whether you’re a beginner or an experienced trader, understanding how to trade the Three Inside Up pattern can significantly improve your technical analysis and increase your chances of catching trend reversals early.
In this post, we’ll explain what the Three Inside Up pattern is, how to identify it, and several actionable trading strategies you can use with real-world context and risk management techniques.
📌 What is the Three Inside Up Pattern?
The Three Inside Up is a bullish reversal candlestick pattern that appears at the bottom of a downtrend. It signals that bearish momentum is weakening and a potential reversal to the upside may be underway.
✅ Pattern Structure
The pattern consists of three consecutive candlesticks:
- First candle: A long bearish candle that continues the prevailing downtrend.
- Second candle: A smaller bullish candle that forms within the body of the first candle — indicating hesitation or a pause in selling.
- Third candle: A bullish candle that closes above the high of the first candle, confirming the reversal.
Here’s a simplified visualization:
Day 1: Long red candle
Day 2: Small green candle inside Day 1
Day 3: Larger green candle closing above Day 1’s high
🧠 Psychological Insight Behind the Pattern
- Day 1 shows sellers dominating the market.
- Day 2 reflects a slowdown in bearish momentum as buyers begin to enter.
- Day 3 confirms that buyers have taken control, and a reversal may be starting.
📈 Trading Strategies Using the Three Inside Up Pattern
Let’s explore several ways you can trade the Three Inside Up pattern effectively.
🔹 Strategy 1: Basic Reversal Trade
Ideal for beginners who want to trade the pattern directly.
Steps:
- Identify the Three Inside Up pattern at the bottom of a downtrend.
- Enter a long position at the open of the fourth candle.
- Set a stop-loss below the low of the pattern (lowest of the three candles).
- Use a risk-reward ratio of 1:2 or 1:3.
Example:
- Stock XYZ is in a downtrend and forms a Three Inside Up on the daily chart.
- Day 4 opens slightly above the pattern.
- Entry at ₹105, stop-loss at ₹98, target at ₹119 (1:2 ratio).
🔹 Strategy 2: Confirmation with RSI Divergence
Combines candlestick patterns with RSI for higher accuracy.
Steps:
- Look for RSI to show bullish divergence (price makes lower lows, RSI makes higher lows).
- Wait for the Three Inside Up pattern to appear.
- Enter long on the fourth candle if RSI is crossing above 30 or 40.
- Set a tight stop-loss and a wider target.
Why it works: RSI divergence indicates weakening bearish momentum, and the pattern confirms the shift.
🔹 Strategy 3: Moving Average Filter
Ideal for trend confirmation and reducing false signals.
Steps:
- Add a 50-period simple moving average (SMA) to your chart.
- Only trade the Three Inside Up when:
- The pattern forms below the 50 SMA.
- The third candle closes above the 50 SMA or touches it.
- Enter on candle 4.
- Exit on resistance or trailing stop.
Benefit: This strategy ensures you are entering as the trend might be reversing significantly.
🔹 Strategy 4: Volume Confirmation
Add conviction by confirming with a spike in volume.
Steps:
- Identify the Three Inside Up pattern.
- Look for above-average volume on the third candle.
- Enter long if volume is higher than the 20-period average.
- Exit using Fibonacci levels or previous resistance zones.
Example:
- Nifty 50 stock forms a Three Inside Up on a 1-hour chart.
- Volume on the third candle is 1.5x the average.
- Enter long, set stop-loss below the pattern, and aim for a resistance zone.
🔹 Strategy 5: Intraday Trading with 5-Min/15-Min Charts
For day traders looking to capture short-term reversals.
Steps:
- Use 5-min or 15-min charts.
- Identify a local downtrend during the session.
- Spot a Three Inside Up near support or VWAP (Volume Weighted Average Price).
- Enter trade on the break of the third candle’s high.
- Exit using a tight stop-loss and quick target (e.g., 0.5% to 1%).
Caution: Use this strategy only when volatility is manageable and spreads are tight.
🛡️ Risk Management Tips
- Never rely on one pattern alone — always combine it with support/resistance, indicators, or trendlines.
- Use a trailing stop once your trade moves in your favor.
- Avoid trading this pattern in strong bear markets without additional confirmation.
- Always backtest your strategy before using real capital.
📊 Backtesting the Three Inside Up
Before using this pattern in live trades, test it on historical data:
- Go through charts on platforms like TradingView.
- Use the “Bar Replay” function to manually test.
- Note win rate, average return, and maximum drawdown.
🚫 When NOT to Trade the Pattern
Avoid trading the Three Inside Up if:
- The market is in a strong downtrend without any signs of exhaustion.
- The pattern forms in the middle of a sideways range.
- The third candle closes weakly (e.g., with a long upper wick).
✅ Final Thoughts
The Three Inside Up candlestick pattern is a powerful bullish reversal signal when used correctly. By combining it with indicators like RSI, moving averages, volume, or support zones, you can greatly improve the accuracy of your trades.
Remember: Candlestick patterns are not crystal balls. They’re clues—valuable ones—but best used as part of a broader trading system.
Your Turn!
Have you used the Three Inside Up pattern in your trading? What strategy works best for you?