What is the three outside down candlestick pattern?

The three outside down candlestick pattern generally occurs during a bullish trend and involves three consecutive candlesticks. The movement of these candles invariably indicate whether a trend reversal is on the cards or not. The pattern is characterised by a single bullish candle, followed by two bearish candles. Accurate identification of this pattern is essential for executing counter-trend trading strategies.

The three outside down candlestick pattern - an example

Understanding this technical indicator is quite easy. Let’s take an example to see what the three outside down patterns actually look like.

As you can see in the figure, the price is trending hard in the upward direction, indicating that the bulls are in control of the market. In keeping with the trend, the first candle in the pattern closes positively. However, the body of the candle remains small, which can be construed as an indication of a slow down in the buying interest. The second candle opens ‘gap up’ signifying the bulls’ effort to push the prices further upward.

At this point, the buying interest completely loses steam and the bears enter the market. This sudden influx of sellers in the market turns the tables, with the price plummeting downward. The bears’ grip on the second session is so intense that the closing price of the second candle ends up being lower than the opening price of the bullish candle. Due to such high amounts of selling pressure, the second candle ends up completely ‘engulfing’ the first candle. Continuing on with the onslaught, the bears pick up the pace in the third session, with the final candle in the pattern also ending up negative.

Here’s a key point that you should note. For this pattern to be considered successful, it is highly essential for the third bearish candle to close below the second bearish engulfing candle. This acts as a sort of a confirmation of the bearish trend reversal.