Three inside up and three inside down

Three inside up and three inside down are three-candle patterns that start with a harami: a small candle inside a large one. The third candle confirms the turn, adding a verdict to the harami's hint. The pattern is a harami with a verdict, and the verdict is the third candle's close.

What defines the pattern

The pattern begins with a harami: a large candle followed by a small candle whose body is inside the large candle's body. For three inside up, the first candle is bearish, the second is a small bullish or bearish candle inside the first, and the third is a bullish candle that closes above the first candle's open. For three inside down, the first candle is bullish, the second is a small candle inside the first, and the third is a bearish candle that closes below the first candle's open.

The third candle must close beyond the first candle's open to confirm the turn. A third candle that does not close beyond that level is not a confirmation, and the pattern is not complete. The rule is strict: the third candle's close is the verdict.

The numbers behind the rule: rule 3I-1 (three inside up) needs a down candle with a body of at least 1 ATR, an up candle whose body lies inside the first body and is at most 60 percent of it, and a third, up candle that closes above the first candle's open, after a fall in which the close before the three stands at least 3 ATR below the highest close of the 10 sessions ending there. Rule 3I-2 (three inside down) is the mirror, after a rise. Each counts as formed when the third candle closes. ATR is the average true range of the last 14 sessions.

What the third candle adds

The harami alone is a hint: a large move followed by a small candle that stays inside the large candle's body. It suggests that the previous move has paused, but it does not say that a reversal has happened. The third candle adds a verdict: a close in the opposite direction, beyond the first candle's open, shows that the pause has turned into a move the other way.

The third candle is the confirmation. It is the difference between a hint and a statement. Without the third candle, the harami is only a possibility. With the third candle, the pattern is complete, and the reversal is said to be confirmed by the close.

Why the pattern is a harami with a verdict

The pattern is called three inside because the second candle is inside the first, and the third candle confirms the turn. The pattern is a harami with a verdict because the harami is the first two candles, and the third candle is the verdict. The verdict is the close of the third candle: it must close beyond the first candle's open to confirm the reversal.

The pattern is a three-candle reversal pattern. It is used to spot a potential turn after a move, but the turn is only confirmed by the third candle. The pattern does not say how far the reversal will go, and it does not say that the reversal will continue. It only says that a turn has been confirmed by the close.

Where the pattern fails

The pattern can fail if the third candle closes beyond the first candle's open but then price reverses again. A confirmed turn is not a guaranteed turn; the market can always change its mind. The pattern also fails if the third candle does not close beyond the first candle's open: the pattern is not complete, and the harami remains a hint without a verdict.

A failed pattern is common: the third candle may close beyond the first candle's open, but the next candle may reverse and take price back in the original direction. The pattern describes what price has already done; it does not predict what it will do next.

What the chart under the heading shows

The chart under the heading is a three inside up on the iShares MSCI Philippines fund (EPHE). The first candle, 25 February 2021, was a down candle from 30.26 to 29.66 dollars; the second, 26 February, an up candle from 30.00 to 30.19 whose body lies inside the first; the third, 1 March, opened at 30.77 and closed at 30.88, above the first candle's open of 30.26. It counted as formed at that close.

It is the only occurrence. Rule 3I-1 found one three inside up in ten years across the Philippines fund, the PLDT ADR and gold futures, and rule 3I-2 found no three inside down on any of them. The page therefore draws the up version only and says so; the down version is described in words, with no chart, because the rule did not find one.

Patterns describe, they do not predict

Three inside up and three inside down are descriptions of what price has already done: a harami followed by a candle that confirms the turn. They are not forecasts of what price will do next. The patterns do not say that the reversal will continue, and they do not say how far it will go. They only say that a turn has been confirmed by the close.

A reader who sees these patterns on a chart should read them as confirmed turns, not as signals. The patterns are useful ways to see where price has reversed, but the next move is not written in the patterns. The patterns describe; they do not predict.

What the count says

Rule 3I-1 found one three inside up in ten years, on the Philippines fund, and none on the PLDT ADR or on gold futures. Rule 3I-2 found no three inside down on any of the three instruments. One occurrence in a decade across three series is a very small number, and it supports no statement about how the pattern behaves.

The rule is strict on three counts at once: a first body of 1 ATR, a second body inside it and under 60 percent of it, and a third close beyond the first open, after a 3 ATR fall or rise. Few real sequences meet all three.

The first candle sets the tone, but does not promise the turn

The first candle of a three inside up or down is the long body that begins the pattern. It shows the market moving with force in the direction of the prevailing trend. A trader looking at this candle alone sees continuation, not reversal. The long body is the result of buyers or sellers pressing their advantage, and it often closes near its extreme.

That first candle matters because it defines the size of the move the market must reject. Without a substantial first candle, the harami that follows has less meaning. A tiny first candle followed by an inside candle is just noise. The pattern needs a clear push in one direction before the second candle can show hesitation.

The middle candle is the market catching its breath

The second candle of the pattern is the harami candle, which means it is completely inside the range of the first candle. Its body is smaller, and both its high and low stay within the first candle's high and low. This candle shows that the force behind the first candle has weakened. Sellers in a downtrend or buyers in an uptrend are no longer in full control.

What makes this candle important is not its size but its placement. A harami after a strong move tells you that the market is pausing. The pause can be a sign of indecision, or it can be a sign that the opposite side is starting to push back. Without the third candle, this is just a harami, and a harami on its own is a weak signal.

The middle candle is often overlooked because nothing dramatic happens. But in the context of the three inside pattern, it is the bridge between the old trend and the possible new one. It is the moment when the market stops trending and starts to consider a different direction.

The close of the third candle is the only close that counts

This requirement makes the pattern binary. Either the third candle closes beyond the first candle, or it does not. There is no half-confirmation. When the close is just barely beyond the first candle's range, the signal is weaker than when the close is decisive. A decisive close suggests the new direction has real commitment.

Traders who act before the close are anticipating the pattern, not trading it. The pattern is only complete when the third candle has closed. Anything before that is a bet that the close will be in the right place. The third candle's close is what turns a two-candle harami into a three-candle signal.

The pattern works best when it appears after a long move, not a short one

A three inside up or down after a brief pullback is often just a pause in the larger trend. The pattern has more meaning when it appears after a sustained move in one direction. After a long decline, a three inside up suggests that sellers are exhausted. After a long rally, a three inside down suggests that buyers are running out of steam.

This is why the same pattern can fail in one place and work in another. The three candles are identical, but the market context is different. A pattern that appears after a long move is a potential turning point. A pattern that appears in the middle of a range is just noise.

The pattern looks like a pause that gets resolved

The order of events matters more than the shape of any single candle. A harami alone can appear in the middle of a strong trend and go nowhere. The third candle is what turns the setup into a usable description: the close above the first candle's high means the attempted rejection of lower prices got follow-through. That follow-through can be weak, with a small-bodied third candle, or strong, with a close near its high. The difference shows up in the next few bars, which is why the pattern is best read as a pause that gets resolved rather than a guarantee of a turn.