In this lesson, we'll explore how the "Three Inside Down" candlestick pattern signals a price reversal after a bullish trend. We'll also discuss a trading system that effectively utilizes this pattern to capitalize on potential market downturns.

• What is the Three Inside Down Pattern?
• Key Points of the Three Inside Down Pattern
• Identifying a Three Inside Down Candlestick Pattern
• What the Three Inside Down Pattern Indicates to Traders
• Limitations of Using the Three Inside Down Pattern
• Effective Trading Tactics for Three Inside Down Patterns

A bearish reversal candlestick pattern that comprises of a large up candle, a smaller down candle, and another down candle is known as Three Inside Down. The last down candle always closes (in price) below the second candle's closing price, while the first large up candle always contains the smaller down candle.

The psychology of the pattern starts with an upward price trend. The bulls are in charge and driving the price upward, signaling the beginning of this candle pattern. On the chart, a tall green candle confirms the bullish buying pressure. Then there's a little red candle, which is the first symptom of weakness. The bears are currently in a battle with the bulls, which they are winning. If the next day's closing is lower, the bears have wrested control from the bulls, and price is expected to fall further. It usually does, but only 61% of the time.

• A bearish reversal pattern composed of a large up candle, a smaller down candle contained within the prior candle, and then another down candle that closes below the close of the second candle is known as the three inside down pattern.
• These patterns are transient in nature, and they may or may not lead to a large or even modest trend shift.
• Consider utilizing these patterns as part of a larger trend. Use the three inside down, for example, during a downturn in an overall rally.

This is a strong reversal indication that shows up around the top of an uptrend. As with previous reversal candlestick patterns, the first candle's upturn is still continuing. However, as seen by powerful bearish candles, the upswing begins to wane in the subsequent candles. If the pattern is confirmed, the bullish cycle is over. After a period of rise, the price begins to decline.

Consider the following facts to establish that the candlestick pattern is 'three inside down.'

• The market is on the rise.
• The first candle is a large green (Bullish) candle.
• The second candle is a little red (Bearish) candle with a real body that opens and shuts within the first candle's body.
• The third candle is a red (Bearish) candle that closes lower than the second candle's closing.

The three inside down patterns do not need to be traded. It might just be a signal that the short-term price trend is altering. A long position can be placed on the third candle, or on the following open for a bearish three inside down at the end of the day, for those who wish to trade it. A stop loss might be set at the low of the third, second, or first candle. The risk tolerance of the trader determines this.

Because of its broad use, the pattern isn't always accurate. It's also short-term, so while huge trend shifts are possible, they're more likely to be moderate to medium-sized movements in the new direction. The price may not advance in the projected direction and instead return to the preceding trend's direction if the pattern is followed.

If the primary price trend is upward, avoid relying on this candle pattern. Price has a strong tendency to break out upward in this instance, resuming the upward trend. Save this candle for downward price movements where the three inside down candle is formed by a short upward retracement. Those are more likely to experience a downward breakout and a long-term slide.

• If this candle pattern emerges at the top of a trend channel, swing traders can trade it. Price will decrease to the channel's bottom end before rebounding.
• You may believe there is no need to confirm the bearish harami a second time because a lower closing confirms it and makes a three inside down candle. Waiting for a lower finish after the three inside down candles completes might increase the reversal rate from 61 percent to 84 percent (bull market). However, waiting means you'll probably make less money.