Overview
Bearish Three Outside Down
Also known as: Confirmed Bearish Engulfing, Three Outside Down Turn, Engulfing Confirmation
The three outside down is a confirmed bearish engulfing pattern. A small bullish candle is engulfed by a larger bearish candle, then a third bearish candle closes below the second candle's low, providing definitive confirmation of the reversal.
The three outside down adds a confirmation candle to the standard bearish engulfing pattern, significantly improving its reliability. The pattern begins with a small bullish candle followed by a larger bearish candle whose body completely engulfs the first candle's body (the bearish engulfing). The third candle then closes below the second candle's low, proving that the engulfing was not a false signal. This three-candle structure removes much of the ambiguity associated with standalone engulfing patterns. The progressive escalation of bearish pressure—from a weak bullish candle to an engulfing to a confirmation—creates a high-confidence reversal signal that institutional and retail traders alike respect.
History & Etymology
The three outside down is a modern formalization of the bearish engulfing pattern with confirmation. While the engulfing pattern dates back centuries in Japanese trading, the three-candle confirmed version was popularized by Western analysts who added the confirmation requirement for improved reliability.
'Three' indicates the three-candle formation. 'Outside' refers to the second candle being outside (engulfing) the first candle. 'Down' indicates the bearish resolution with the third candle continuing lower.
How It Forms
Formation Steps
- 1First candle is a small bullish candle in an uptrend
- 2Second candle is a large bearish candle that engulfs the first candle's body (bearish engulfing)
- 3Third candle is a bearish candle that closes below the second candle's low, confirming the reversal
Prerequisites
- Established uptrend or rally
- The first candle should be relatively small
Confirmation Signals
- Third candle closes below the second candle's low
- Increasing volume on the second and third candles
- RSI turning down
Invalidation Signals
- Third candle closes above the second candle's open
- Bullish follow-through after the engulfing
- Volume dries up on the third candle
Candle Breakdown
Small Bullish Candle
A small bullish candle that represents the final, weakening push of the uptrend.
The small body shows that bullish momentum has weakened significantly.
Engulfing Candle
A large bearish candle whose body completely engulfs the first candle's body, signaling a dramatic momentum shift.
Sellers overwhelm the prior session's buyers entirely. The size contrast between the two candles highlights the power shift.
Confirmation Candle
A bearish candle that closes below the engulfing candle's low, confirming the reversal is genuine.
The follow-through selling removes any doubt. The reversal is confirmed with conviction.
Psychology
The three outside down captures a clear three-stage reversal: weakening momentum, dramatic shift, and confirmation. This progression gives traders at every experience level a clear framework for the reversal.
Buyer Perspective
Buyers see their momentum fading (small first candle), then watch helplessly as sellers take control (engulfing), and finally capitulate as the confirmation drives price lower.
Seller Perspective
Sellers recognize the weakening momentum, enter aggressively on the engulfing candle, and press their advantage on the confirmation candle.
Smart Money Action
Smart money enters short on the engulfing candle and adds on the confirmation, building a position across two sessions.
Retail Trader Trap
Retail traders hold long through the engulfing hoping for recovery, and are forced out by the confirmation candle.
Emotional Cycle
Trading Strategy
Aggressive Entry
Enter short at the close of the engulfing candle (second candle), anticipating confirmation.
Conservative Entry
Enter short when the third candle closes below the second candle's low.
Equal to the engulfing candle's range projected below its low
Next major support level
2x the engulfing candle's range
Best Conditions
- Timeframe: 1D
- Timeframe: 4h
- Timeframe: 1h
- After extended rallies
- At resistance levels
- Overbought markets
- Asset: Stocks
- Asset: Forex
- Asset: Indices
- Asset: Crypto
Avoid When
- Timeframe: 1m
- Timeframe: 5m
- Strong momentum uptrends
Confluence Factors
- Pattern at resistance
- RSI overbought
- Volume increasing
- Bearish divergence
- Moving average nearby
Scale In Strategy
Enter on the engulfing, add on the confirmation.
Scale Out Strategy
Take 50% at the first target, trail the rest.
Risk Management
Volume Analysis
Volume Confirmation
Volume should increase from the first candle through the third, showing escalating selling pressure.
Volume Profile
Highest volume on the engulfing or confirmation candle.
Volume Divergence
Declining volume on the third candle weakens the signal.
Technical Confluence
Support Resistance
The engulfing candle's high becomes strong resistance. The first candle's low is the initial target.
Fibonacci Levels
The pattern often forms at Fibonacci retracement levels of prior declines.
Moving Averages
Breaking below the 20 EMA on the confirmation candle adds momentum confirmation.
Rsi Confirmation
RSI dropping from above 70 during the pattern confirms the overbought reversal.
Macd Confirmation
MACD bearish crossover during the pattern adds confirmation.
Bollinger Bands
The engulfing at or above the upper band with confirmation returning to the middle band.
Vwap
Third candle closing below VWAP confirms intraday bearish shift.
Ichimoku Cloud
Pattern above the cloud with the third candle approaching it signals transition.
Elliott Wave
Often marks the end of Wave 5 or Wave C.
Wyckoff Phase
Can signal the end of distribution and start of markdown.
Market Profile
Failed auction above value followed by rotation back into the value area.
Order Flow
Strong negative delta on both the engulfing and confirmation candles.
Open Interest
Monitor open interest for confirmation of institutional participation.
Multi-Timeframe Analysis
Higher Timeframe Alignment
Daily three outside down at weekly resistance is very high conviction.
Lower Timeframe Entry
Use the 4H chart for precise entry timing within the daily pattern.
Timeframe Confluence
4H pattern at daily resistance with weekly bearish setup.
Top-Down Approach
Weekly resistance > Daily three outside down > 4H entry.
Statistics
Historical Examples
Apple Three Outside Down
successApple formed a three outside down at $175 after a summer rally. The confirmation led to a decline to $135 over the next two months.
Lesson: Three outside down in large-cap stocks after significant rallies can signal multi-week declines.
Variations
Three Outside Down with Gap
The third candle gaps down from the second candle's close, adding conviction.
Confusion Matrix
Patterns commonly confused with Bearish Three Outside Down and how to distinguish them.
Bearish Three Inside Down
7500% similarIf the second candle is LARGER than the first (engulfs it), it is three outside down. If the second candle is SMALLER (inside), it is three inside down.
Key Differences
- Three outside down: second candle engulfs the first (outside)
- Three inside down: second candle is inside the first
- Opposite candle size relationships
The Bearish Engulfing is one of the most powerful and commonly traded two-candle reversal patterns. A large bearish candle completely engulfs the prior bullish candle, demonstrating a decisive shift from buying to selling dominance.
A bearish outside reversal occurs when a candle's range completely engulfs the prior candle's entire range (highs and lows), closing near its low. It signals that sellers have overwhelmed buyers and a reversal is likely.
Three black crows is a powerful bearish reversal pattern consisting of three consecutive long bearish candles, each opening within the prior candle's body and closing near its low. It signals strong, persistent selling pressure and a likely trend reversal.
The three inside down is a confirmed bearish harami pattern. A long bullish candle is followed by a smaller bearish candle inside its body, then a third bearish candle closes below the first candle's low, providing definitive reversal confirmation.
The Bullish Three Outside Up is a three-candle reversal pattern combining a bullish engulfing with a confirming third candle that closes higher, providing one of the strongest reversal signals in candlestick analysis.
The Bearish Abandoned Baby is one of the rarest and most reliable top reversal patterns in candlestick analysis. It features a doji that is completely isolated by gaps on both sides, signaling an abrupt and dramatic shift from buying to selling pressure.
Pro Tips & Common Mistakes
Pro Tips
- The three outside down is more reliable than a standalone bearish engulfing—always wait for the confirmation candle.
- Volume should increase from the first candle to the third for maximum conviction.
- The pattern is especially powerful at the 200 SMA or significant resistance levels.
- Use the engulfing candle's range as a guide for the measured move target.
Common Mistakes
- Trading the engulfing without waiting for confirmation
- Accepting weak confirmation (small third candle)
- Ignoring volume analysis
Advanced Techniques
- Use the midpoint of the engulfing candle as a key level—if price reclaims this level, the pattern may fail.
- Combine with options: sell call spreads above the engulfing candle's high for defined-risk bearish exposure.
Institutional Perspective
The three outside down represents institutional selling that builds over three sessions: probing on the engulfing, then committing on the confirmation.
Fun Facts
- The three outside down has approximately 10-12% higher success rate than a standalone bearish engulfing, demonstrating the value of confirmation.
- In backtesting, the three outside down consistently ranks among the top 10 most reliable bearish candlestick patterns.
Frequently Asked Questions
A three-candle bearish reversal: a small bullish candle, a larger bearish engulfing candle, and a third bearish candle closing below the engulfing candle's low. It is a confirmed bearish engulfing pattern.