Professional and experienced investors utilize every opportunity in the stock market to make profits. If the stock prices are falling, they start their research to identify a stock that is undervalued and invest in it at a time when the price is poised to rise.
On the other hand, they book their profits or short-sell at a time when they know the stock price may fall soon, followed by further investments when the price is low. This creates a chain reaction of profits in either of the situations. However, to predict the market trend and understand the technicalities of the stock, Technical Analysis proves to be the go-to method, and within it, numerous factors such as Three Inside Up and Three Inside Down Candlestick pattern.
In this blog, you will learn about Technical Analysis, Candlestick Charts, and how you can use the Three Inside Up and Three Inside Down Candlestick patterns.
What is Technical Analysis?
Technical analysis is the study of chart patterns, graphs, and diagrams on a screen. The idea is to understand price and volume trends to pick stocks accordingly. Technical analysis is based on the premise that historical price trends tend to repeat over time. In technical analysis, you sit with historical stock charts, look at price and volume data, and then plot various trends. Based on past wisdom, you find patterns to trade for the future.
What are Candlestick Charts?
If you have ever looked at a chart or graph of stock, you may have seen what looks like colored candles positioned in various places. These are called candlesticks, and the chart is called the candlestick chart. Candlesticks visually represent the size of the price fluctuations of a specific stock. Investors use these candlesticks to understand where the market is going (market trend) based on the price fluctuations and help them predict the trend reversal (when the current trend will be reversed).
What is the Three Inside Up/Down Candlestick pattern?
The Three Inside Up and Three Inside Down Candlestick pattern is a candle reversal pattern that contains a trio of candlesticks and appears on a stock’s candlestick chart. The Three Inside Up/Down pattern predicts that the current market trend has lost its momentum and reached its potential, and it will most probably head in the opposite direction.
The Three Inside Up pattern is a bullish reversal candlestick pattern that contains a large down candle, a smaller up candle, and another up candle. The smaller up candle is always contained within the first large down candle, and the last up candle always closes (in price) above the closing price of the second candle.
The Three Inside Down is a bearish reversal candlestick pattern that has a large up candle, a smaller down candle, and another down candle. In the Three Inside Down pattern, the second candle is also contained within the first candle, and the last down candle always closes (in price) below the closing price of the second candle.
How to trade the Three Inside Up/Down Candlestick Pattern?
The Three Inside Up candlestick pattern is bullish. When it is identified, it means that the current fall in price, which has continued for a significant amount of time, has reached its potential and can only go higher from there. With this, investors can know that if they enter a trade at this point, the prices may rise and they can make profits.
The Three Inside Down candlestick pattern is bearish. When it is identified on the chart, it indicates that the current rise in prices, which has continued for a long time, is nearing its end. With this, investors know that they can book profits as the prices may go lower.
The Three Inside Up/Down candlestick pattern is a technical factor that investors need not trade but use as a mere indicator. However, if you want to trade based on the pattern, you can take a long position at the end of the day on the following open or the third candle for the Three Inside Up pattern. For the Three Inside Down, you can take a short position or book profits on the third candle near the end of the day or the following open.
What are the Three Inside Up/Down Trader Psychology?
The trader psychology for the Three Inside Up and Three Inside Down is as follows:
The Three Inside Up
In the Three Inside up, the fall in prices continues to happen at the first candle because of investors selling the stock in large volumes. This results in discouraging buyers as they feel that if they invest at this time, the price might reduce further.
On the other hand, it is an encouraging factor for the sellers who either want to book profits or cut their losses, fearing a further fall in the prices. The second candle closes higher than the first candle’s previous close and the current open, raising concern for the investors. Short-sellers can use this situation as an ideal exit. The third candle is where the bullish candle reverses and attracts investors who want to take a long position.
The Three Inside Down
In the Three Inside Down, the price rise continues on the first candle owing to increased buyer interest. This encourages buyers as the price is rising and discourages sellers who hope for a further price increase.
The second candle closes below the first candle’s previous close and current open. It raises a concern and results in buyers selling their long positions. The third candle is where the bearish candle reverses and forces investors with long positions to sell and short sellers to take advantage of the falling prices.
Final Word
The Three Inside Up/Down pattern is short-term in nature and a fairly common pattern to spot on the candlestick chart. Once identified, you can use the pattern to find the ideal entry and exit point for any stock by predicting where the trend along with the price might go soon. However, it is wise to include other technical indicators before you create a position.
