Three Inside Up/Down: A Simple Candlestick Reversal Pattern

Three inside up and down is one of the most straightforward candlestick reversal patterns. Three candles, clear rules, and a 65% success rate. It’s perfect for traders who like simple, visual patterns.

What Is Three Inside Up/Down?

Three Inside Down (Bearish to Bullish)

1. A large down candle (strong selling)
2. A small candle completely inside the range of the first (consolidation/indecision)
3. A large up candle (strong buying, reversal)

Three Inside Up (Bullish to Bearish)

1. A large up candle (strong buying)
2. A small candle completely inside the range of the first (consolidation/indecision)
3. A large down candle (strong selling, reversal)

The pattern signals that momentum has shifted.

Visual Pattern

Three Inside Down (Bearish to Bullish)

First:   Big down candle (low point important)

Second:  Small candle (doji or small body, completely inside first)

Third:   Big up candle (breaks above first candle's high = reversal)

Three Inside Up (Bullish to Bearish)

First:   Big up candle (high point important)

Second:  Small candle (doji or small body, completely inside first)

Third:   Big down candle (breaks below first candle's low = reversal)

How to Identify the Pattern

Check Candle #1: Is it Large? A large down candle in an uptrend or large up candle in a downtrend shows commitment from one side. A small first candle weakens the signal.

Check Candle #2: Is It Completely Inside? The second candle’s high must be below the first candle’s high. The second candle’s low must be above the first candle’s low. No overlap at all.

Check Candle #3: Does It Reverse? The third candle must close in the opposite direction of the first candle. An up candle after a down first candle (or vice versa).

If all three are true, you have the pattern.

How to Trade Three Inside Up/Down

Entry Enter on the close of the third candle if it closes in the reversal direction. Or wait for the next candle to confirm and enter on its close.

Stop Loss Place your stop 5-10 pips beyond the opposite extreme of the pattern. For a three inside down (bullish reversal), your stop is below the low of the pattern.

Profit Target Measure the range of the first candle. Project that distance from the third candle in the direction of the reversal.

Example Trade

EURUSD 1H chart:

• Candle 1: Strong down, opens 1.0900, closes 1.0850 (50-pip down candle)
• Candle 2: Small doji, opens 1.0880, closes 1.0875 (tiny candle, completely inside)
• Candle 3: Strong up, opens 1.0876, closes 1.0905 (29-pip up candle)

Three inside down is complete. You enter long on the close of candle 3 at 1.0905.

Stop: 1.0840 (below the low of candle 1, 65 pips) Target: 1.0900 + (1.0900 - 1.0850) = 1.0950 (measure first candle range, project up, 45 pips)

Risk = 65 pips. Reward = 45 pips. Ratio = 0.69:1 (unfavorable).

You skip this trade because the target is too close to the stop. The pattern is clear but the geometry isn’t favorable.

Better Example

GBPUSD 4H chart:

• Candle 1: Strong down, opens 1.2950, closes 1.2850 (100-pip down candle)
• Candle 2: Small doji, completely inside (1.2900-1.2900, essentially no movement)
• Candle 3: Strong up, opens 1.2875, closes 1.2950 (75-pip up candle)

Three inside down, and it occurred right at support level (1.2850 was tested yesterday). You enter long at 1.2950.

Stop: 1.2840 (10 pips below the pattern, at prior support) Target: 1.2950 + 100 = 1.3050 (project first candle’s 100-pip range upward)

Risk = 10 pips. Reward = 100 pips. Ratio = 10:1 (excellent).

Price rallies to 1.3050. You close 100 pips profit.

Why Three Inside Up/Down Works

Sentiment Shift: The large first candle shows commitment from one side. The small second candle shows that commitment is broken. The large third candle shows the opposite side has taken control. This clear sentiment shift is a strong reversal signal.

Volatility Reversion: The pattern represents compression (small candle) followed by expansion (large third candle). This volatility expansion often carries significant moves.

Psychological: Traders who were confident in the original direction (saw the large first candle) are now trapped. The small second candle shakes them out. The large third candle confirms their thesis is wrong. They panic exit, fueling the reversal.

Common Mistakes

Entering Before the Third Candle Closes Don’t enter on the open of the third candle or midway through. Wait for it to close. The pattern isn’t confirmed until the third candle closes in the reversal direction.

Mistaking a Three Inside for Random Candles The second candle must be completely inside the first—no overlap. If candle 2 touches the extreme of candle 1, it’s not a valid pattern.

Target Too Close Use the first candle’s range as your target distance. Projecting only 20 pips when the first candle was 100 pips is leaving money on the table.

Trading at Random Price Levels A three inside pattern at support/resistance has higher success rate (70%+) than at random price levels (55%). Log whether your patterns were at levels or random. You’ll adjust your trading accordingly.

Ignoring the First Candle’s Size A small first candle produces a weak signal. A large first candle produces a strong signal. Log first candle size and track success rate by size.

Advanced: Multi-Timeframe Confirmation

A three inside pattern on the 1H becomes more reliable if:

• The 4H is also showing reversal signals
• The 4H MACD is crossed or about to cross
• The pattern occurs at 4H support/resistance

Trading three inside on 1H within the context of 4H reversal significantly increases accuracy.

Journaling Three Inside Trades

1. Log the Size of Candle #1 Larger = stronger signal.

2. Verify Candle #2 Is it completely inside? How small?

3. Confirm Candle #3 Does it close in reversal direction? Is it large?

4. Note Confluence Is the pattern at support/resistance? This dramatically improves accuracy.

5. Record Entry Type Aggressive (third candle close) or conservative (next candle confirmation)?

6. Track Results Did price reach your target? What was actual R:R vs. expected?

7. Log Hit Rate by Confluence Patterns at levels vs. random price. This teaches you where to focus.

Tools

Use the Pip Calculator to size positions based on your tight stops. Three inside patterns have relatively small stops, so you can size up compared to other patterns.

Final Thought

Three inside up/down is elegant in its simplicity. Three candles, clear identification rules, and a high success rate. It’s perfect for traders who don’t want complicated patterns.

The traders who excel with three inside are the ones who:

1. Only trade patterns at support/resistance (not random levels)
2. Wait for all three candles to close before entering
3. Set targets using the first candle’s range
4. Keep stops tight (5-10 pips)
5. Journal confluence and success rate to see which conditions produce best results

Start scanning your 1H and 4H charts for three inside patterns. When you find one at a clear support/resistance level with good R:R, enter with confidence.