What is the Three Inside Down Candlestick Pattern?

What is the Three Inside Down Candlestick Pattern?

The three-inside-down candlestick pattern is a strong bearish reversal pattern that shows a possible change in the trend from bullish to bearish. This pattern consists of three candles and forms at the top of an uptrend. Most traders use this pattern to plan against countertrends. It can be used for both intraday and short-term trades. In this blog, we will discuss three inside-down candlestick reversal patterns, how to identify them, strategies to trade this pattern, and a lot more. 

Three Inside Down Candlestick Pattern Meaning 

The three inside down candlestick pattern is similar to the three outside down pattern in that it likewise consists of three successive candlesticks. That is probably going to happen in a bull market trend. One lengthy bullish candle leads the pattern, which is followed by two noticeably smaller bearish candles. When this pattern forms at the peak of an upward trend, it suggests that the trend is probably going to turn around and the asset's price will drop.   

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Table of Content

  1. Three Inside Down Candlestick Pattern Meaning 
  2. Example of the Three Inside Down Candlestick Pattern
  3. How to Identify the Three Inside Down Candlestick Pattern
  4. When does Three Inside Down Candlestick happen?
  5. How to Trade the Three Inside Down Pattern
  6. Strategies to Trade The Three Inside Down Candlestick Pattern
  7. How to use the three inside down pattern?
  8. What are the Advantages of the Three Inside Down Candlestick Pattern?
  9. What are the Disadvantages of Three Inside Down Candlestick?

Example of the Three Inside Down Candlestick Pattern

Let's take an example of a hypothetical stock chart where:

On the first day, the candle is large and green in color, which indicates that there is a lot of purchasing pressure throughout the day and that the day starts with a strong bullish attitude. The second day starts higher, but as the bullish momentum decreases, the size of the red candle also decreases. The second candle's whole body is inside the first candle viewing angle and forms an overpowering angle. 

On the third day, we can see that the bearish mood has picked up, resulting in a red candle that closed below the second candle's low. When sellers take the initiative and push the prices lower, confirming the bearish signal reversal, we can see that the three inside down candlestick reversal pattern is completed. 

How to Identify the Three Inside Down Candlestick Pattern

To identify the three inside down candlesticks, you should recognise the different characteristics of the three candles. Here's a guide on how to identify them:

First Candle: To identify the first candle look for a bullish pattern as this candle represents the popular uptrend in the market. 

Second Candle: This candle is bearish and comes under the first candle's range. This candle lowers the bullish momentum.

Close of the second candle: The close of this candle can be 50% lower than the level of the first candle's body. 

Third candle: This candle confirms the pattern and it closes below the first candle's low. It also finalises the bearish reversal signal.

When does Three Inside Down Candlestick happen?

When the market sentiment shifts from a bullish to a bearish trend the three inside down candlestick pattern occurs. This pattern generally occurs when prices are going upward, suggesting that purchasing power may be running low. Traders can notice this pattern on charts as the bullish momentum starts to fall, and sellers begin to claim themselves. This pattern tends to be reliable when it is accompanied by other technical indicators providing traders the opportunity to consider short positions or to adjust their trading strategies.

How to Trade the Three Inside Down Pattern

To trade properly most of the candlestick patterns need additional validation and therefore you need to take into account other forms of analytics in your strategy. Some filter categories can work very well in a variety of markets and these are volatility filters, volume filters, and seasonality factors. 

Volume Filters

When these filters are combined with the candlestick pattern analysis, they can offer some important information about market behaviour. There are two typical volume situations are as follows:

  • Volume of Current Bar vs. Next Bar: This filter is straightforward and it can be created by comparing the volume of the current bar with the previous bar.
  • Maximum or Minimum Volume: By establishing conditions based on past volume readings over a predetermined number of bars, more powerful filtering can be achieved

By adjusting the volume criteria with the traits of three inside down patterns you can improve your analysis further.

Time-based Tendencies and Seasonality

Depending on a particular date or time you can check the recurring trends in market behaviour. You can identify these time-based tendencies and seasonality by complementing the three inside-down pattern analysis techniques. You can consider these factors:

  • Day of the Week: Trading decisions can be influenced depending on the day it can increase the bullish or bearish tendency. 
  • Part of the Month: You can identify trends in the performance by splitting the month into two or three equal parts. 
  • Time of Day: Certain patterns might be more common during specific trading sessions, therefore time-based aspects should be taken into account.

Strategies to Trade The Three Inside Down Candlestick Pattern

Here are the three main strategies you can follow to trade the three inside down candlestick reversal pattern

Strategy 1: Pullback on Naked Charts

The pattern of three inside down candlestick offers a great chance for a bearish reversal when the price is going downward. You need to wait for a pullback to happen, and then watch for the Three Inside Down pattern to show up. This frequently signals the conclusion of the retreat phase and the start of a fresh downward trend. 

Strategy 2: Moving Average

The moving average plays an important role in identifying trends. You can take advantage of the pullbacks to the moving average to do trading when the price is below the moving average and is moving downwards. Here is the plan of action:

  • You can identify the downtrend when the price is trading below a moving average.
  • Wait for the reversal of the price that touches the moving average.
  • You need to watch for the development of a Three Inside Down pattern at the moving average. 
  • When the falls below the Three Inside Down pattern's final candle's low, it is time to short the market.
  • In the end, just decide on your take-profit and stop-loss thresholds.

Strategy 3: Trading The Three Inside Down With Resistance Levels

To spot price reversals the levels of support and resistance are important. You need to pay attention to resistance levels when trading this pattern to identify possible short opportunities. This is how it works: 

  • Draw the levels of resistance on your charts. 
  • A resistance level should be approached and interacted with by the price.
  • At that point, keep an eye out for the Three Inside Down pattern to appear.
  • Once the price falls below the Three Inside Down pattern final candle low, open a short trade.
  • Decide on appropriate levels for your take-profit and stop-loss. Anticipate a decline. 

How to use the three inside down pattern?

To use the Three Inside Down candlestick pattern you need careful observation and understanding of its important components. Here's how you can use this pattern:

  • First, you need to start by identifying the bullish trend on the candlestick charts because it forms the backdrop against which this pattern will possibly signal a reversal.
  • Spot the first candle of this pattern by looking for a long bullish candle because this candle will represent the rest of the bullish momentum in the market. 
  • After identifying the first candle, you need to look for a short bearish candle that forms next. This candle will be short and entirely observed in the first candle. 
  • The third candle is itself a confirmation candle so there is no need for trend confirmation. The third candle will bearish and it will close below the low of the first candle and the second bearish candle. 
  • Once all these requirements are confirmed traders can put their favourite trading tactics into action, like altering stop-loss levels or opening short positions.

What are the Advantages of the Three Inside Down Candlestick Pattern?

The following are the advantages of the Three Inside Down Candlestick Pattern:

Easily Identified

On the price chart, this pattern can be easily identified.  Its unique shape helps traders and investors to identify it on a price chart. An investor looks for a long bullish candlestick that is completely covered by a smaller bullish candlestick, and a trader looks for a long bearish candlestick that closes below the bottom of the second candlestick.

Appropriate for Intraday and Short Term Trading

This pattern is perfect for intraday and short-term trading because it can reveal a slight shift in trends for the traders of intraday and short-term trading.

Furthermore, this pattern is a useful addition to other technical indicators like the Relative Strength Index (RSI), moving averages, and Fibonacci retracement levels. Due to its compatibility, traders can mix different analysis tools to create more reliable trading methods. This pattern can be adapted to a variety of financial markets—such as equities, bonds, currency, and commodities which allows it to be used with a broad range of trading instruments and asset classes.

What are the Disadvantages of Three Inside Down Candlestick?

Here are the disadvantages of Three Inside Down Candlestick:

Tendency to Signal Small or Irrelevant Reversals: The major drawback of this pattern is it sometimes signals small or irrelevant reversals. Even if the pattern can point to a possible trend reversal, these are frequently short. Investors who make trading decisions exclusively based on Three Inside Down indications may lose money, particularly if they fail to consider the larger picture of the market. Short-term and intraday trading methods, when minute price swings are more significant, are better suited for this pattern.

Tendency to Generate Misleading Signals: The Three Inside Down pattern's tendency to generate misleading signals is another drawback. Traders that make trading decisions exclusively based on this pattern run the danger of receiving misleading signals, which could result in losses. Investors should combine this pattern with other technical indicators to reduce this risk. Before making a deal, this method offers a more thorough examination of the market conditions and aids in cross-checking signals.

To sum up, the three inside down candlestick pattern is a strong and reliable sign of an approaching market reversal. When it appears during an upward trend, traders are alerted to possible negative pressure and are prompted to review their positions. Traders can navigate the market more accurately by following trading strategies and can make decisions that go with their goals. Additionally, to practise proper risk management and avoid relying solely on a single pattern or indicator traders can use online trading app.

FAQs on Three Inside Down Candlestick Pattern

No, this pattern is a bearish reversal because it appears when the bullish trend ends and it signals an upcoming downward reversal.

This pattern is commonly used in the financial market, which includes stocks, bonds, forex, and more. 

It is bearish and it consists of three candles: the first one is a large candle, the second is smaller and engulfed in the first candle, and the third candle closes below the second candle. 

In the case of the three inside down candlestick pattern, the uptrend has ended and a downtrend has begun.

By adding more technical indicators, like moving averages or Fibonacci retracement levels, to validate signals, traders can increase the pattern's trading efficiency. 

The pattern could indicate minor or insignificant reversals, resulting in temporary changes in the market. 

The main advantage of this pattern is it is easy to identify on price charts which makes it accessible to traders of all experience levels.