Who says three is crowd? With the right candlesticks in the right formation, three candles can signify a reversal in the market. Today we’re exploring the Three Inside Down candlestick pattern, which could also be described as a Bearish Harami with a third candle to confirm the signal’s intimation. Want to learn more about this simple but effective pattern? Scroll down to discover its formation and meaning.

Three Inside Down Candlestick Pattern

Formation

If you’re on the hunt for a Three Inside Down candlestick pattern, look for the following criteria:

First, an uptrend should be in progress. Second, a tall white (or green) candle must appear, continuing the upward movement. Third, a small black (or red) candle must form on the following day, and its body must be contained within the previous day’s body. Either the tops or the bottoms of the bodies may be the same price. Fourth and finally, another black (or red) candle must appear, closing below the prior day’s close.

As we mentioned above, this pattern is essentially a confirmed Bearish Harami pattern. The first two candles compose the Harami, and the last candle confirms that a reversal has occurred by closing below the previous day’s close. Due to the confirmation candle, traders are more likely to trust the Three Inside Down signal than the Bearish Harami.

The opposite of a Three Inside Down pattern is a Three Inside Up pattern. It consists of a large black candle, a small white candle contained within it, and a white candle that closes above the previous day’s high.

Finally, we can’t talk about the Three Inside Down candlestick pattern without mentioning the Evening Star. Although very similar in formation, there are two significant differences between these two signals. First, in the Three Inside Down, the second candle must be contained within the first candle’s body. Second, in the Evening Star, the last candle must close at least halfway down the first candle’s body.

Meaning

An uptrend is in progress, and the bulls continue their reign throughout the first day. In fact, the price rises significantly, forming a long candle. However, the bears seize control on the second day, pushing the price gently back down. Although this slight reversal could indicate a larger shift on the horizon, investors may be hesitant until the third day. At this point, another bearish candle confirms the reversal. It dips below the open of the first day, affirming a notable change in investor sentiment.

A steep preceding price trend strengthens this reversal pattern, because the market can rarely maintain such a rapid price movement. In addition, the placement of the second candle may relay the force of the reversal. If the second candle is located near the top of the first candle, the reversal will likely be slow; if the second candle is located near the bottom of the first candle, the reversal will likely be strong.

Confirmation

Yes, the Three Inside Down candlestick pattern contains a confirming candle. However, this doesn’t mean that you shouldn’t wait for further confirmation before acting. Indeed, many investors will wait for another black candle, a gap down, or a lower close for assurance that the downtrend will continue. So you tell me: are you feeling lucky? Your answer may determine whether you choose to act on the Harami or the Three Inside Down or wait for further confirmation.

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