In the previous article, we learned about the Bullish Engulfing pattern. The Bullish Engulfing candlestick pattern works 65% of the time. In technical analysis, one way to increase the probability of success is to wait for an extra candlestick confirmation after the formation of a pattern.
The Three Outside Up candlestick pattern is a new pattern that forms if we wait for an extra candlestick confirmation in the Bullish Engulfing pattern. Thus, the Three Outside Up candlestick pattern obviously has better chances of being a bullish reversal pattern. While the Bullish Engulfing pattern works 65% of the time, the Three Outside Up candlestick pattern works 75% of the time.
This is how to spot a Three Outside Up pattern on a candlestick chart:
1) Like in all the patterns we are going to discuss, the long-term trend (1-year trend) should be in an uptrend. There is very little chance to succeed if the long-term trend is against your favor. Remember, it is difficult to swim against the tide. Our job as technical chart readers is to wait for the right time when the tide itself is going where we want to go.
2) The intermediate-term trend (3 months trend) should also be preferably bullish.
3) There should be a minor correction or a pullback. Remember, as a trend follower, a minor pullback after a bullish upswing is the best time to enter.
4) First candle is bearish red. The size of the candle is not important. It can be small (in case of a star) or big (in case of an extended candle).
5) The second candle is bullish (green) and extended whose body completely overlaps the first candle’s real body. If we look at the candle formation till now, it looks like a Bullish Engulfing candlestick pattern.
6) Third candle is also bullish that closes above the second candle’s close.