Candlestick chart patterns typically consist of from one to several Candlesticks and have specific meanings depending on the way they come together.
The Bullish Three Inside Up and the Bearish Three Inside Down Candlestick chart patterns make up two of the basic three candlestick chart patterns used by forex traders in their technical analysis.
Bullish Three Inside Up Features
The Bullish Three Inside Up Candlestick chart pattern is characterized by a long black day that closes at or near the day’s low.
This is then followed by a short bodied white day which indicates a narrow trading range and would form the two-candlestick chart pattern known as the Bullish Harami pattern.
The third candlestick would then form the Bullish Three Inside Up chart pattern. This consists of a white candle with a higher closing price than the previous day’s white candle. The third white candle confirms the Bullish Harami in forming the Bullish Three Inside Up pattern.
The Psychology of the Bullish Three Inside Up Pattern
The market has been in a downtrend as the first long black candle is formed, typically on high volume. This will make the bears complacent in their comfort that the market will continue heading south.
The next day, the market stops declining as volume dries up and trades in a narrow range. This second white candlestick is engulfed by the body of the first black candlestick and closes higher on the day, indicating a possible reversal of the downtrend and indecision in the market.
The third white candle, by closing higher than the previous close indicates the confirmation of the uptrend and the subsequent squeeze on the sleeping bears.
Applying the Bullish Three Inside Up Candlestick in a Forex Trade
The Bullish Three Inside Up is a bullish reversal pattern and so will generally be traded on the long side. The forex trader typically uses the Bullish Harami as an initial bullish signal that forms the basis for initiating a trade.
Often more conservative forex traders will wait for a further confirmation such as a gap on the upside or a long white day. Nevertheless, the Bullish Three Inside Up pattern in and of itself has proven to be a reliable bullish reversal pattern.
Additional Bullish Three Inside Up Trading Considerations
The key element to a trader in taking advantage of the Bullish Three Inside Up Candlestick chart reversal pattern consists of the last white candle. The higher close from the previous day’s white candle indicates the strength of the reversal.
Right after the previous day’s high is exceeded, on the third day of the Bullish Three Inside Up pattern would give the trader a clear signal to establish a long position in the forex market, depending on the risk the trader is willing to assume.
For a forex trader less willing to assume risk, waiting for additional confirmation – that might come from the next day’s trading, for example – might be preferred.
Also, entering a stop loss order at the low of the second day’s candle would complete the strategy and keep the trading risk factor under control.