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Written and copyright © 2008-2010 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 outside down candlestick is a bearish reversal with a good record of reversing the upward price trend. It has a frequency ranking of 21, so you will be able to find it easily enough
in a historical price trend or in real time. The overall performance rank could use some help, and by that I mean price does not trend as often as I would like, but the results are respectable
enough.
You will want to give the three outside down candlestick pattern plenty of room to run. If you sell after 10 days, the drop after a downward breakout is pathetic -- a few percentage points
on average. Upward breakouts do much better by a multiple of 2 or 3. The worst performing configuration is after a downward breakout in a bull market. Avoid that scenario.
Important Results
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Theoretical performance: Bearish reversal
Tested performance: Bearish reversal 69% of the time
Frequency rank: 21
Overall performance rank: 39
Best percentage meeting price target: 55% (bull market, up breakout)
Best average move in 10 days: 6.30% (bear market, up breakout)
Best 10-day performance rank: 13 (bull market, up 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.
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 Three Outside Down
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Discussion
As I mentioned in the introduction, the three outside down candlestick acts in theory as a bullish reversal. Testing shows that it also performs that way 69% of the time. That is
very good. The overall performance rank is 39th, meaning that there are 38 other candle patterns that perform better, but who’s counting?
The best average move 10 days after the breakout is a rise of 6.3% in a bear market. I consider moves of 6% or higher to be good ones, so this candlestick does well. The best performance rank
after 10 days is 13th, which is also quite high. That happens after an upward breakout in a bull market.
Identification Guidelines
| Characteristic | Discussion |
| Number of candle lines | Three. |
| Price trend leading to the pattern | Upward. |
| Configuration | Look for a white candle in an upward price trend. Following that, a black candle opens higher and closes lower than the prior candle’s body. The last day
is a candle with a lower close. |
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 outside down candles that appear within a third of the yearly low perform best -- page 777.
- Select tall candles for the best performance -- page 777-778.
- The best performing three outside down candlestick occurs as an upward retracement of the primary down trend -- page 778-779.
Example
The three outside down candlestick appears circled in red on the daily scale. It begins with a white candle in an upward price trend.
After that, a black candle appears that engulfs the body of the white candle. That means the black candle has a higher open and a lower close than the white candle. Wrapping up
the three outside down is a black candle with a lower close.
The three outside down is supposed to be a bearish reversal of the upward price trend, but this is an example of the candle acting as a continuation of the move higher.
The stock breaks out upward from the three outside down when price closes above the top of the candlestick. Since the price leading to the candle is upward and an upward exit results,
it is a continuation pattern and not a reversal in this example.
The ideal trading setup for this candlestick is when the primary trend is downward and a retrace of that downtrend occurs. Price bubbles up, forms the three outside down candlestick,
and then price breaks out downward, rejoining the downtrend already underway.
-- Thomas Bulkowski
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