Three Outside Up & Down

An engulfing, then a higher close

By: 42Fibonacci
Updated: 27 Oct 2026
Read time: 7–9 min

Three Outside Up is a Bullish Engulfing after a decline, followed by a third candle that closes above the engulfing close; Three Outside Down is the bearish mirror. The third close is the confirmation, built in. It shows the takeover held, but waiting for it means entering later, further from the same stop.

At a glance

Type: Three-candle reversal
Variants: Up (after a decline) and Down (after a rally)
Story: Buyers took over for a day, then kept going the next
Key rule: A Bullish Engulfing, then a third close above the engulfing close
Confirmation: Built in: the third close is the confirmation
Stop: Below the pattern's low, with room (above its high for Down)

What Makes a Three Outside Up

A Three Outside Up is a Bullish Engulfing followed by one more candle that closes above the engulfing close. It forms after a decline, and it takes three candles.

The name describes the first two. The second candle's body sits outside the first one: it opens below the red candle's close and closes above its open, wrapping the whole body (the thick part between open and close). The third candle is the follow-through that turns the pair into a three-candle pattern.

The mirror, a Three Outside Down, is a Bearish Engulfing after a rally, followed by a candle that closes below the engulfing close. This guide teaches the bullish form first and the bearish one as its mirror.

First candle: A red candle that continues the decline. Its body is the one the next candle wraps.
Second candle (the engulfing): A green candle that opens below the first candle's close and closes above its open. Only the bodies count; the shadows (the thin lines above and below) don't have to be wrapped.
Third candle: Closes above the engulfing candle's close. Usually green, but what definitions agree on is the higher close, not the color.

Note

The third candle's close is the whole difference. Until it closes, the chart shows a Bullish Engulfing, not a Three Outside Up. A third session that trades above the engulfing close at midday can still close below it.

How a Three Outside Up Forms

Three sessions, three moods: sellers in control, buyers taking over, and buyers still there the next day.

Session one: the decline continues

"Another down day. Sellers are still in charge."

A red candle extends the decline. Nothing about it looks like a turn; it sets the body the next candle has to wrap.

Session two: buyers take over

"Opened lower, closed above yesterday's open."

The session opens below the red close, so sellers start in control. Then buyers push price all the way through the red body and close above where it began. Everything sellers achieved yesterday is erased in one session: a Bullish Engulfing.

Session three: the takeover holds

"Higher again. Yesterday was not a one-off."

The third session closes above the engulfing close. Buyers did not give the gain back overnight; they added to it. That second day of buying is what the pattern adds to the engulfing.

The Confirmation Is Built In

Many reversal patterns ask you to wait for a confirming close: a later candle that closes in the new direction and shows the pattern was not a one-day event. A Bullish Engulfing does not strictly need one, because its own close, above the red candle's open, already shows buyers in control. Cautious traders wait for one more close anyway. The Three Outside Up is that extra close, given a name.

So the question is not whether to wait for confirmation. The pattern has already waited one day for you. The question is whether that day was worth what it cost.

What the third candle costsIllustrative

Candles 1 and 2 are a Bullish Engulfing; candle 3 closes higher and makes it a Three Outside Up. A trader can enter on the engulfing close or wait for the third close. Either way the idea is wrong below the pattern's low (here, the engulfing candle's low), so the stop does not move. The two bars show the price of waiting: the later entry sits further from the same stop, so each share risks more.

What the third close adds: a second day of evidence. The engulfing showed buyers could take control for one session. The third close shows they kept it. In practice, waiting filters out the engulfings whose next day fails to close above the engulfing close: a trader who waits never enters those.

What it costs: entry price. The idea is wrong if price falls back below the pattern's low, wherever you entered, so the stop stays put while the entry moves up. Sized correctly, you still risk the same dollar amount, but on fewer shares, and the move from the engulfing close to the third close is already gone. If the trade works, it pays less.

The two grow together. A third candle that closes far above the engulfing close is strong evidence and an expensive entry. One that closes barely above it adds little information, and costs little too. Neither is right by default; check the distance to the stop before deciding the pattern is worth trading.

Tip

Tall candles help. Compare the engulfing candle with the last few weeks of candles. A tall one shows a real push; one that is only average in size shows an ordinary day, even if it wraps the red body.

Three Outside Up vs. Three Inside Up and Three White Soldiers

Two other three-candle bullish patterns look close to this one. They differ in what the first two candles do before the third candle closes higher.

Three Outside Up

The second body wraps the first: an engulfing
The third close is above the engulfing close

Three Inside Up

The second body sits inside the first: a harami
The third close is above the first candle's open

Three White Soldiers

Three long green candles in a row, each closing higher
No red candle and no engulfing

Outside versus inside. The Three Inside Up starts from the opposite second candle: a small body inside the red one (a Harami), a pause rather than a takeover. Its third candle has more work to do, because the Harami has not yet closed above the red candle's open. In a Three Outside Up the engulfing has already closed above the red body, and the third candle only has to hold the gain and add to it.

Steady buying versus a takeover. Three White Soldiers show buyers in charge for three sessions straight; there is no red candle for anyone to take over from. A Three Outside Up starts with sellers still in control and records the moment buyers took over. It can lead into a run of soldiers, but the two patterns describe different stories. Read the Three White Soldiers guide →

Three Outside Up vs Three Outside Down

The two are mirrors: every rule flips.

Three Outside Up

After a decline: a Bullish Engulfing, then a higher close
Invalidated by a close below the pattern's low

Three Outside Down

After a rally: a Bearish Engulfing, then a lower close
Invalidated by a close above the pattern's high

In a Three Outside Down, a red candle opens above a green candle's close and closes below its open, then the next candle closes lower still. Sellers took over for a day and were still there the next.

How to Trade a Three Outside Up

Check there was a decline to reverse
Look for a run of lower highs and lower lows into the pattern.
Check the engulfing
The green body has to wrap the red body. A long engulfing candle, longer than the recent candles, shows a bigger takeover than one that barely covers a small red body.
Measure the cost of the third close
Before entering on the third close, measure the distance down to the stop. If it is much wider than your usual risk, size down or pass; the pattern does not owe you a tight stop.
Put the stop below the pattern's low
A close below the lowest point of the first two candles erases the takeover. That is usually the engulfing candle's low; if the first candle's shadow reaches lower, use that. A stop order triggers the moment price trades there during the day, so leave some room: a small fraction of a normal day's range.

Worked example

A stock that usually moves about $1.50 a day has fallen for three weeks. The engulfing candle closed at $51.45 with a low of $49.40, wrapping the previous red body. Today's candle closed at $52.30, above the engulfing close. You plan to risk $300 on the trade, with the stop at $49.30, ten cents below $49.40, the pattern's low.

How much does waiting for the third close cost here?

The approach

Entering on the engulfing close would have risked $2.15 a share ($51.45 − $49.30), or 139 shares for $300. Entering on today's close risks $3.00 a share ($52.30 − $49.30), or 100 shares. The dollar risk is the same; the share count is not. If the stock later reaches $55, the early entry makes $493 (139 × $3.55) and the later one $270 (100 × $2.70). In exchange, the trader who waited would not have bought at all if today had failed to close above $51.45. Both are reasonable trades. The mistake would be keeping the 139-share size at the higher entry, which turns a $300 risk into $417.

Reading Three Outside Up in Context

The pattern says buyers took over and held on for a day. Context says whether that happened somewhere it matters.

Moving averages. A Three Outside Up that turns up from a rising 50-day moving average reads as the end of a pullback inside an uptrend. Under a falling one, it may be only a bounce inside a downtrend. Read the Candlesticks + Moving Averages guide →

Fibonacci levels. A pattern whose low sits on a common Fibonacci retracement (a level that marks how much of the last rally has been given back) formed at a price many traders had marked in advance. Read the Candlesticks + Fibonacci guide →

Volume. Heavier volume on the engulfing candle means more shares changed hands in the session that reversed the red body, so the takeover had real participation. Read the Candlesticks + Volume guide →

The weekly chart. A daily Three Outside Up that forms while the weekly trend still points up is a dip in a larger advance; against a falling weekly trend, it has more to prove. Read the Candlesticks + Timeframes guide →

Common Three Outside Mistakes

Mistake	Instead
Waiting for a fourth candle One more green close and I will be sure.	The third close is the confirmation. Waiting for a fourth repeats the same trade: a little more evidence for a later, more expensive entry.
Keeping the engulfing-entry size Same trade, same number of shares, one day later.	The stop did not move but the entry did. Recalculate the size from the new distance to the stop.
Counting shadows instead of bodies The green candle's range covers the red one, so it is an engulfing.	The bodies decide. A green body that does not wrap the red body is not an engulfing, whatever the shadows do.
Finding it without a decline Red, big green, higher close in a flat stretch, so a reversal is coming.	A reversal needs something to reverse. In a sideways drift, the same three candles are just a few good days.

Key takeaways

Three Outside Up is a Bullish Engulfing after a decline, then a third candle that closes above the engulfing close; Three Outside Down is the bearish mirror
The third close is the confirmation, built into the pattern. No further candle is needed
That confirmation costs entry price: the stop stays below the pattern's low while the entry moves up
A higher third close shows more follow-through and makes a more expensive entry. Measure the distance to the stop before trading it

Frequently Asked Questions

What is the Three Outside Up candlestick pattern?

A three-candle bullish reversal. After a decline, a red candle is followed by a green candle whose body wraps it (a Bullish Engulfing), and then by a third candle that closes above the engulfing candle's close. It shows buyers took over and were still there the next day.

What is Three Outside Down?

The bearish mirror: after a rally, a green candle is followed by a red candle whose body wraps it (a Bearish Engulfing), then by a third candle that closes below the engulfing candle's close.

Is Three Outside Up bullish?

Yes. Three Outside Up is a bullish reversal pattern and Three Outside Down a bearish one. Both need a trend before them to reverse: a decline for the bullish form, a rally for the bearish one.

Is Three Outside Up more reliable than a Bullish Engulfing?

It is better confirmed, not guaranteed. The third candle's close adds a second day of buying, so the engulfing has already been followed through. The price is a later entry with the same stop below the pattern's low, so the trade pays less if it works.

Does Three Outside Up need confirmation?

No. The third candle's close is the confirmation, built into the pattern, so the pattern is complete and confirmed at that close.

Does the third candle have to be green?

Usually it is, but what definitions agree on is the close: it has to be above the engulfing candle's close. Where it closes matters more than its color.

Where does the stop loss go?

Below the pattern's low, the lowest point of the first two candles, with some room. That is usually the engulfing candle's low. The stop is the same whether you enter on the engulfing close or the third close, so the later entry risks more per share.

What is the difference between Three Outside Up and Three Inside Up?

The second candle. In Three Outside Up its body wraps the first candle's body (an engulfing). In Three Inside Up its body sits inside the first candle's body (a harami), and the third candle has to close above the first candle's open.

Who created the Three Outside Up pattern?

Gregory Morris, author of Candlestick Charting Explained, is credited with it. The idea behind it is older: an engulfing followed by a confirming close.

The Bottom Line

A Three Outside Up is the patient trader's Bullish Engulfing. Instead of acting on the takeover the day it happens, you let one more session show that buyers are still there.

That patience is not free. The stop is still below the pattern's low, and every cent the third candle rises is a cent more risk per share. Use the extra day as evidence, size the trade from where you actually enter, and check that the pattern formed somewhere that matters.

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