Technical Analysis gives you a better understanding of the market and its price action using tools and indicators represented by the candlesticks. The candlestick displays the behaviour of the security and provides valuable insights into the potential trend reversals, making it easy to identify and trade for beginners.
In this article, we will understand the Three Inside Down candlestick pattern, its structure, the psychological pattern of candlesticks, how to trade the pattern with an example, and its advantages and disadvantages.
What are the Three Inside Down candlesticks?
The Three Inside Down candlestick pattern signals a potential bearish reversal of the trend, utilizing a three-candlestick formation to indicate the upcoming downtrend.
The term “inside” refers to the second candlestick as it is formed within the first candlestick. The Three Inside Down Candlestick indicates that buyer strength is reducing slowly, and sellers are taking over the trend.
Structure of Three Inside Down Candlestick Pattern
It is spotted at the top of an uptrend.
- First candlestick: A large bullish candlestick is formed, signaling the continuation of an uptrend.
- Second candlestick: A small bearish candlestick is formed within the body of the first candlestick and displays the selling pressure of the security.
- Third candlestick: A strong bearish candlestick is formed, displaying seller’s strength, as the candlestick opens below the closing of the second candlestick and closes below the low of the first candlestick by confirming the downtrend.
The Three Inside Down candlestick pattern psychology
- Bullish Candlestick: The security is in an uptrend, as buyers are dominant, driving the price to its high, and it indicates the continuation of the uptrend ahead.
- Sellers step in: At the first candlestick, the price is at its peak, and the sellers see an opportunity and step in aggressively to push the price down to its low. The second candlestick opens in red and does not cross the high of the first candlestick. It displays the seller’s strength and indicates the start of a bearish trend reversal.
- Bearish closing and confirmation of the downtrend: Sellers are dominating the trend, pushing the price down, and the third candlestick closes below the low of the first candlestick, confirming the bearish trend reversal.
How to trade the Three Inside Down Candlestick?
The Three Inside Down candlestick is versatile across all the frames.
After spotting the Three Inside Down candlestick at the top of the uptrend, plan for a short position entry after the confirmation.
Entry:
- After the third candlestick closes below the low of the first candlestick, you can enter a short trade in the security.
Stop-loss:
- An ideal stop-loss is at the high of the first candlestick.
Target:
- The primary target is the next support line.
- You can set the target for the trade according to your risk-reward ratios.
Example scenario:
In the image below, you can look at the chart of “ Rupa & Co Ltd” stock at a 1-hour timeframe on 16th July 2024, and you can see the sell signal generated by the Three Inside Down candlestick pattern.
What are the advantages of the Three Inside Down candlesticks pattern?
- The pattern is easy to spot and versatile across all timeframes, providing clear entry and exit points for all traders.
- The third candlestick is the trend confirmation candle. You need not wait for the next candle after spotting the pattern.
- As your entry is after the closing of the third candlestick, you can capture the entire trend, providing you with a good risk-reward ratio.
- As it is a three-candlestick formation, the chances of false signals are low.
What are the disadvantages of the Three Inside Down candlestick pattern?
- For the pattern to be more efficient, it requires an uptrend to signal a strong potential reversal.
- In a sideways market, due to a lack of volume and a weak uptrend, can Produce False Signals.
- It signals the potential reversal, but does not describe the strength of the upcoming trend.
In Closing
In this article, we discussed the Three Inside Down candlestick pattern, its structure, the psychology of the pattern, how to trade it, along with an example, and its advantages and disadvantages.
The Three Inside Down candlestick is a powerful candlestick signalling the potential bearish trend reversal. At the same time, it offers multiple opportunities for beginners with clear entry and exit signals. Making it an accessible and reliable pattern to trade.
No indicator or tool is 100% accurate in the financial markets. When the Three Inside Down candlestick pattern is combined with additional indicators or tools, its efficiency and accuracy are high, and with proper risk management, discipline, and back testing of the strategy can pave the path to profitability.
