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Written and copyright © 2008-2011 by Thomas N. Bulkowski. All rights reserved.
In my book,
Encyclopedia of Candlestick Charts  , pictured on the right,
I explore the entire range of candlestick patterns from abandoned babies to windows (not exactly A to Z, but you get the idea), in both bull and bear markets, using almost 5 million candle lines
in the tests.
The book takes an in-depth look at 103 candlestick patterns and reports on behavior and rank (3 types: reversal rate, frequency, and overall performance), identification guidelines,
performance statistics (tables of general statistics, height, and volume), trading tactics (tables of statistics on reversal rates and performance indicators),
and wraps each chapter with a sample trade. I share a sliver of that information below. If you like what you read here, then you will love the book. Help support this website and buy a copy
by clicking on the above link.
The three inside down candlestick acts as a reversal, but not as frequently as I would like. A check of the numbers shows that reversals occur most often within a third of the yearly
low, regardless of market conditions (bull or bear).
The frequency rank is 33rd out of 103 candlestick patterns, so this is an easy one to spot in a crowd. The overall performance after 10 days is just mid range. You will want to avoid
trading this candle after a downward breakout in a bull market. That combination gives the worst performance after 10 days. If you ignore the 10 day restriction, then avoid the
three inside down pattern in a bull market. This candle does best in a bear market.
Three Inside Down: Important Results
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Theoretical performance: Bearish reversal
Tested performance: Bearish reversal 60% of the time
Frequency rank: 33
Overall performance rank: 56
Best percentage meeting price target: 58% (bull market, up breakout)
Best average move in 10 days: 4.93% (bear market, up breakout)
Best 10-day performance rank: 30 (bear market, down breakout)
All ranks are out of 103 candlestick patterns with the top performer ranking 1. "Best" means the highest rated of the four combinations of bull/bear market, up/down breakouts.
The above numbers are based on hundreds of perfect trades. See the glossary for definitions.
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 Three Inside Down
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Three Inside Down: Discussion
The three inside down candlestick is supposed to act as a bearish reversal in theory and testing shows that it does but only 60% of the time. If 50% represents random behavior then
a 60% reversal rate does not inspire confidence. The overall performance rank is 56 and that is just mid list, too. It suggests that the post breakout trend is not awe-inspiring.
The best percentage move 10 days after the breakout is a rise of 4.93% after an upward breakout. That ranks 30th. I consider moves of 6% or higher as good ones, so this is well
behind the pack.
Three Inside Down: Identification Guidelines
| Characteristic | Discussion |
| Number of candle lines | Three. |
| Price trend leading to the pattern | Upward. |
| Configuration | Look for a tall white candle in an upward price trend. Following that, a small black candle appears with the open and close within the body of the first day.
The tops or bottoms of the two bodies can be the same price, but not both. The last day must close lower, but can be any color.
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Three Inside Down: Three Trading Tidbits
If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on. The pages refer to the book
where the tips appear.
- Three inside down candles that appear within a third of the yearly low perform best -- page 741.
- Select tall candles for the best performance -- page 742.
- Look for the three inside down candlestick as an upward retracement in a downward price trend for the best performance -- page 743.
Three Inside Down: Example
The three inside down candlestick is a bearish harami with a confirming candle as the third day, according to Morris who created this candle
pattern. The chart shows an example of the three inside down circled in red. An upward price trend leads to a tall white candle. Following
that, a smaller black candle appears that fits inside the body of the white candle. The last day has a lower close, but the candle can be any color. The lower close confirms
the reversal (downward move).
This example of the three inside down pattern functions as a bullish reversal. Why? Because price trends upward into the candle and breaks out downward. A downward breakout
happens when price closes below the bottom of the candlestick pattern.
The best way to trade the three inside down is to find it in an upward retrace of the downward price trend. By that I mean the longer term trend should be moving lower and then price retraces a
portion of the down move. At the top of the upward retrace, the three inside down appears and it signals the end of the uptrend. When the downward breakout occurs, price
rejoins the downward trend already established.
-- Thomas Bulkowski
Copyright © 2008-2011 by Thomas N. Bulkowski. All rights reserved. Breakfast.exe halted: Cereal port not responding.
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