3 Inside up/ down in TradeMachine®
    • 15 May 2024
    • 2 Minutes to read
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    3 Inside up/ down in TradeMachine®

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    Article summary

    This will cover the 3 Inside Up/ Down technical conditions within TradeMachine® which are candlestick reversal patterns that indicate potential shifts in trend direction.

    What Are Three Inside Up/Down Patterns?

    "Three inside up" and "three inside down" are candlestick reversal patterns seen on charts, each consisting of three candles that suggest a possible shift in the current trend's momentum.

    Understanding the Three Inside Up/Down Candlestick Patterns

    Three Inside Up (Bullish Pattern):

    Indicates a potential end to a downward trend and a start of an upward movement.

    Characteristics:

    • Occurs during a downtrend.
    • The first candle is a large down candle.
    • The second candle is a small up candle that opens and closes within the body of the first candle.
    • The third candle is a up candle that closes above the second candle’s close.

    Three Inside Down (Bearish Pattern):

    Signals a potential end to an upward trend and the start of a downward movement.

    Characteristics:

    • Occurs during an uptrend.
    • The first candle is a large up candle.
    • The second candle is a small down candle that opens and closes within the body of the first candle.
    • The third candle is a down candle that closes below the second candle’s close.

    For a Three-Inside trigger, the following must be true:

    Three Inside Up:

    1. 2 trading days before the trigger, the stock has to be down
    2. 1 trading day before the trigger is an inside candle (we use real body - so open and close not high and low). So to clarify, the open and close of this second day must be inside the high and low of the day before.
    3. The third day in the series (trigger day) must be an up day.

    Three Inside Down:

    1. 2 trading days before the trigger, the stock has to be up
    2. 1 trading day before the trigger is an inside candle (we use real body - so open and close not high and low). So to clarify, the open and close of this second day must be inside the high and low of the day before.
    3. The third day in the series (trigger day) must be a down day.

    Trading the Three Inside Up/Down Candlestick Pattern

    These patterns can be used as alerts for potential short-term price direction changes. For trading:

    Three Inside Up:

    • Enter a long position near the end of the third candle or the following day’s open.
    • Place a stop loss below the low of the third, second, or first candle, depending on risk tolerance.

    Three Inside Down:

    • Enter a short position near the end of the third candle or the following day’s open.
    • Place a stop loss above the high of the third, second, or first candle, depending on risk tolerance.
    • Profit targets are not predefined with these patterns. Traders should use trailing stops, predetermined risk/reward ratios, or other indicators to decide when to exit.

    Conclusion

    The "three inside up" and "three inside down" candlestick patterns are valuable tools for traders seeking to identify potential trend reversals. By understanding the formation and characteristics of these patterns, traders can better anticipate market shifts and make informed trading decisions. While these patterns provide useful signals, it is crucial to confirm them with additional technical indicators and align trades with the overall market trend for improved reliability. Whether used as an alert or a direct trading signal, the three inside patterns can enhance a trader's ability to navigate the complexities of the financial markets.


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