Three Inside Down Pattern: A Complete Guide

You’ve seen it happen a hundred times. You’re riding a beautiful uptrend on the GBP/JPY, the green candles are stacking up, and the momentum feels unstoppable. But then, the market pauses. A small red candle appears, tucked neatly inside the previous day's range. Then—boom—a sharp drop confirms the party is over.

What you just witnessed wasn't a random fluke; it was the Three Inside Down pattern.

For intermediate traders, this pattern is a gift. It’s not just a single candle guessing game; it’s a three-act play that tells the story of bulls losing their grip and bears taking the steering wheel. If you’re tired of getting stopped out by 'fake-out' reversals, this pattern offers the structural confirmation you’ve been looking for.

In this guide, we’re going to strip away the jargon and look at exactly how to spot, validate, and trade this setup with cold, hard numbers.

The Anatomy of a Three Inside Down

The Three Inside Down is a bearish reversal pattern that appears at the top of an uptrend. Think of it as the 'Harami' pattern’s more reliable older brother. While a standard Harami only has two candles, the Three Inside Down adds a third candle for confirmation.

Here is the breakdown of the three specific candles you need to see:

1. Candle One: A large, bullish candle. This represents the final push of the existing uptrend. It should have a healthy body, showing that the buyers are still in control.
2. Candle Two: A smaller bearish candle. The key here is that this candle must be 'inside' the body of the first candle. Ideally, both the open and close are within the previous candle's real body. This is the first sign of hesitation.
3. Candle Three: A bearish candle that closes below the close of the second candle (and ideally below the midpoint or open of the first candle). This is the 'nail in the coffin' that confirms the reversal.

Pro Tip: The 'Inside' part is non-negotiable. If the second candle's body exceeds the first candle's range, it’s not a Three Inside Down; it might be an Engulfing Pattern instead.

The Psychology: What the Market is Telling You

To trade this successfully, you have to stop seeing shapes and start seeing people. Every candlestick pattern is just a visual representation of human emotion: greed, fear, and indecision.

• The First Candle (Greed): The bulls are still confident. They are buying the highs, expecting the trend to continue.
• The Second Candle (Indecision): Suddenly, the buying pressure dries up. The price opens lower or fails to make a new high. Sellers start to step in, but they aren't aggressive yet. The 'inside' nature of this candle shows that the market is squeezed. It’s a standoff.
• The Third Candle (Fear): The standoff breaks. When the third candle closes lower, the bulls who bought at the top of Candle One realize they are 'underwater.' They start hitting the sell button to exit their positions, which adds fuel to the bearish move.

According to Investopedia, this pattern is highly regarded because it requires a confirmation candle, reducing the likelihood of reacting to a simple retracement.

How to Identify the Setup

Let's get practical. You shouldn't be hunting for this pattern on a 1-minute chart; there's too much noise. For the best results, stick to the 4-hour (H4) or Daily (D1) timeframes.

Imagine we are looking at EUR/USD on the Daily chart.

• Day 1: EUR/USD has been climbing for two weeks. It hits 1.0950 and closes with a strong bullish body at 1.1000.
• Day 2: The pair opens at 1.0990. It tries to move higher but fails. It closes at 1.0960. Note that 1.0960 is inside the 1.1000 - 1.0950 range of Day 1.
• Day 3: The price drops immediately. It breaks 1.0960 and closes the day at 1.0910.

This is a textbook Three Inside Down. The high of the move (1.1000) now acts as a psychological ceiling.

The Strategy: Entry, Stop-Loss, and Take-Profit

Knowing the pattern is 20% of the work. The other 80% is execution. Let’s build a hypothetical trade plan for a $10,000 account using the EUR/USD example above.

The Entry

You have two choices here. The aggressive entry is to sell the moment the third candle closes. The conservative entry is to wait for a small pull-back on a lower timeframe (like the 1-hour) after the pattern completes.

• Entry Price: 1.0910 (Close of Candle 3).

The Stop-Loss

Your stop-loss should always be placed above the high of the first candle. This is the point where the pattern is officially 'invalidated.' If the price goes back above that high, the bears have failed.

• Stop-Loss (SL): 1.1010 (10 pips above the high of Candle 1).
• Risk in Pips: 100 pips.

The Take-Profit

Look for the next major support level or use a fixed Risk-to-Reward (R:R) ratio of at least 1:2.

• Target (TP): 1.0710 (200 pips away, achieving a 1:2 R:R).

Warning: Never risk more than 1-2% of your account on a single trade. In this example, if you risk 1% ($100), and your SL is 100 pips, your position size should be 0.10 lots (1 mini lot).

Filtering the Noise: Context Matters

A Three Inside Down in the middle of a sideways range is useless. It’s like a 'Stop' sign in the middle of a forest. To make money with this, you need confluence.

1. Resistance Levels

Does the pattern form at a historical resistance zone? If you see a Three Inside Down hitting a level that has held for months, the probability of success skyrockets.

2. Overbought Indicators

Check your RSI or Stochastics. If the RSI is above 70 (overbought) while the Three Inside Down forms, it adds another layer of evidence that the market is ready to snap back.

3. Volume (The Hidden Clue)

If you have access to volume data (like in Futures trading), look for a spike in volume on the third candle. This shows that big institutional players are participating in the sell-off.

Common Pitfalls to Avoid

Even the best patterns fail. Here is why most traders lose money with the Three Inside Down:

• Ignoring the Trend: This is a reversal pattern. If the overall market is in a massive bullish frenzy due to a central bank interest rate cut, a single 3-candle pattern won't stop it. Don't fight a freight train.
• Small Candle One: If the first candle is tiny (like a Doji), the 'Inside' candle doesn't mean much. You need a strong first candle to show that the subsequent reversal is actually significant.
• Chasing the Move: If the third candle is huge and has already dropped 200 pips, your stop-loss will be too far away. If the R:R doesn't make sense, skip the trade. There will always be another setup.

Conclusion

The Three Inside Down pattern is one of the most logically sound signals in a price action trader's arsenal. It forces you to wait for confirmation, which naturally filters out many of the 'fake' reversals that trap beginner traders.

By combining this pattern with solid risk management and key resistance levels, you transform a simple chart observation into a high-probability trading system.

Your Next Step: Open your demo account today. Go back through the last 3 months of the EUR/USD or GBP/USD daily charts. Find every Three Inside Down pattern and see how many would have hit a 1:2 profit target. Seeing it with your own eyes is the only way to build the 'chart eye' needed for live trading.

Are you finding it difficult to stay patient for the third candle? Let us know in the comments below!

Frequently Asked Questions

What is the difference between Three Inside Down and Three Outside Down?

The Three Inside Down starts with an inside bar (harami), while the Three Outside Down starts with a bearish engulfing candle. Both are bearish reversals, but the Three Inside Down often signals a reversal from a state of indecision, whereas the Outside Down signals a more aggressive immediate rejection.

How reliable is the Three Inside Down pattern in Forex?

While no pattern is 100% accurate, the Three Inside Down is considered high-reliability because it requires a confirmation close. Its success rate increases significantly when found on higher timeframes (H4 and above) and at key resistance levels.

Can I use the Three Inside Down for scalping?

You can, but it is much riskier. On 1-minute or 5-minute charts, market 'noise' often creates these patterns accidentally. For scalping strategies, it is better used as a secondary filter rather than a primary entry signal.