Three Outside Up: Explained in 60 Seconds

A Three Outside Up is a three-candle reversal that appears after a decline and requires the second candle to engulf the first, the third to close higher than the second, and the whole sequence to follow an actual drop.

What the pattern is

The first candle is bearish and continues the down-move. The second candle is bullish and its body completely covers the first candle’s body. The third candle is also bullish and must finish above the second candle’s close. Those three conditions together mark the pattern.

What forms it

Price has already been falling, so the initial bearish candle is simply the latest step lower. The next session opens inside or below that candle yet finishes above its high, swallowing the prior range. The final session opens anywhere but must end higher still, showing that buyers have taken control of the close.

What confirms it

Confirmation is the third candle’s higher close. Without it the two-candle engulfing remains only a possibility; with it the structure is complete. The extra bar is the cost of waiting, and that cost is what separates a completed pattern from an incomplete guess.

How it fails

If the second candle fails to cover the first, or if the third candle does not close above the second, the setup is invalid. Likewise, when the sequence appears after sideways or rising price rather than after a genuine decline, the context required by the pattern is missing and the structure does not qualify.