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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 up candlestick acts as a bullish reversal both in theory and in reality. And it does so quite well. It has a high frequency number, so you should be able to find is as
often as feathers on a duck. The overall performance is also quite good and that means the price trend, post breakout, is worthwhile if not downright tasty. However, you will want to avoid
this candlestick pattern if you hold it for a short term (10 days). Upward breakouts under those conditions do particularly lousy. For longer term holds, avoid those in a bull market
after a downward breakout.
Important Results
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Theoretical performance: Bullish reversal
Tested performance: Bullish reversal 75% of the time
Frequency rank: 24
Overall performance rank: 34
Best percentage meeting price target: 47% (bull market, up breakout)
Best average move in 10 days: -7.14% (bear market, down breakout)
Best 10-day performance rank: 7 (bear market, down 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 Up
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Discussion
Testing shows that the three outside up candlestick acts as a bullish reversal 75% of the time. That is a very good reversal rate. The overall performance ranks 34th, which is also
high on the performance list, so the post breakout trend shows promise.
The best move 10 days after the breakout is a drop of 7.14% in a bear market. That ranks 7th, near the top of the list of 103 candle types. Looking at the measure rule, it says that
the height of the candle added to the top of the candle pattern (an upward breakout) or subtracted from the bottom of the pattern (a downward breakout), gives a price target. Price only
hits the target 47% of the time -- and that is the best showing. It warns not to expect a straight-line run before you encounter a minor high or low along the way.
Identification Guidelines
| Characteristic | Discussion |
| Number of candle lines | Three. |
| Price trend leading to the pattern | Downward. |
| Configuration | Look for a black candle in a downward price trend. Following that, a white candle opens below the prior body and closes above it, too. The last day is a
candle in which price closes higher, according to Morris who developed the candle. |
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 up candles that appear within a third of the yearly low perform best -- page 785.
- Select tall candles for the best performance -- page 785-786.
- For the best performance, look for the pattern in a downward retracement of the upward price trend -- page 786-787.
Example
The chart shows a three outside up candlestick circled in red on the daily scale. In a downward price trend, a black candle appears followed by
a white candle that opens below the prior body, but it may be difficult to see that from the chart. The white candle closes above the body, too. The last day of the three line
candle is another white candle in this example. It shows a higher close.
Since price enters the three outside up from the top and exits out the top, it is a bullish reversal in this instance. However, the best trading setup is one in which
price is trending upward over the longer term. Then price drops in a retrace of that up move followed by an appearance of the three outside up candlestick pattern. An upward
breakout from this candle would rejoin the existing price trend, and off she goes.
-- Thomas Bulkowski
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