Therefore, we are facing a Japanese candlestick pattern used in Trading, specifically, in technical analysis. In this case, it warns us of a change in trend from bearish to bullish that we must take into account. Its opposite is the three bearish outer candlesticks.
In this case, the last candlestick is confirmation and is also bullish. That is, we have a bullish engulfing pattern that is reinforced by the next candle. Keep in mind that the wider the time frame (period of time), the better the prediction.
Operation of the three bullish outside candles
Let’s see how this three outside candlestick pattern works. We have a previous bear market and a bullish engulfing appears. This would indicate a change in trend, that is, prices are expected to increase.
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Then the confirmation candle appears, which is bullish, the one that is more to the right in the image. This reinforces the previous ones, confirming this change in trend. As we see in the figure, the last candlestick is above the previous reversal pattern, the bullish engulfing.
In this way, when anticipating a price increase, it is time to make a decision. Normally, coming from a bear market, we are likely to have taken a long (buy) position. Thus, when prices rise, we will sell to obtain profits (short position).
Characteristics of the three bullish outside candlesticks
The most relevant characteristics of this type of pattern are:
- First, as with other patterns like the piercing pattern, the market must be bearish.
- This pattern needs three candles to appear, one bearish and two bullish, the last one confirming the change in trend.
- The previous candlesticks form a bullish engulfing, so in that two-candlestick pattern, the body (no tails) of the bullish (white), must engulf the body of the bearish (color).
- An additional white candlestick would provide more reliability to the pattern.
- It usually appears when we are close to a relevant support.
Level confirmation and stop loss
A level confirmation is the last closing price, in this case it would be the second (bullish) candlestick. As we are facing a change in trend, the next candlestick, which is also bullish in this pattern, must have its close at a higher point (see figure).
Regarding the stop loss, which is a sell order in which the condition is to reach a minimum price, the pattern of three outside candles could be above or below the price of the next day. Therefore, there is no clear rule regarding this indicator.