Three Inside Down: Confirmed Harami Bearish Reversal

Key Takeaways

• Three inside down adds a confirming down-close to a bearish harami, turning a warning into a tradable signal.
• Bulkowski's testing shows three inside down acts as a bearish reversal about 60 percent of the time.
• Most beginners forget the prior uptrend requirement and label any inside bar a reversal pattern.
• The strongest setups appear at the top of an upward retrace inside a longer downtrend.

What It Is

Three inside down is a three-bar candlestick pattern named by Gregory L. Morris in his work on candlestick filtering. The first bar is a long bullish candle that extends an uptrend. The second bar is a small bearish candle whose body sits inside the first body, completing a bearish harami. The third bar closes below the second bar's close, confirming the reversal.

Without that lower third close, you have only a bearish harami. The third candle is what makes it actionable.

The Intuition

After a steady advance, the first bar extends the move with a long green close. The next bar opens lower, struggles, and closes inside the prior body. That is the first sign that buyer momentum has stalled. The third bar provides confirmation: a lower close that takes the market below the harami low.

The sequence reflects a clean shift in control. Buyers led the first day, fought to a draw the second, and lost the third. That order is what statistical testing captures.

How It Works

Identification rules:

1. The market is in a clear uptrend before the pattern.
2. Candle 1 is a long bullish body.
3. Candle 2 is bearish, opens below candle 1's close, and its real body sits inside candle 1's body. Together candles 1 and 2 form a bearish harami.
4. Candle 3 closes below candle 2's close.

trend       = up
body_1      = bullish, long
body_2      = bearish, inside body_1
close_3     < close_2

A stricter version requires candle 3 to close below candle 1's open. That version is rarer but tends to track Bulkowski's published statistics more closely.

Worked Example

A stock has rallied from 60 to 70 over four weeks. Monday it prints a tall green candle from 69 to 71. Tuesday opens at 70.60, drifts down, and closes at 69.80. Tuesday's body, 69.80 to 70.60, fits inside Monday's 69 to 71 body. That is a bearish harami.

Wednesday opens at 69.40 and closes at 68.30, below Tuesday's 69.80 close and below Monday's 69 open. Three inside down is complete.

A short entry near the Wednesday close at 68.30 with a stop above Monday's high at 71.20 gives 2.90 of risk per share. A 2:1 target sits near 62.50, which lines up with a prior support shelf.

Common Mistakes

1. Acting on the harami alone. Without the third bar's lower close, you have a harami, not three inside down. Their reliabilities are different.
2. Skipping the trend filter. The pattern needs a real uptrend. Inside a range, the same shapes carry no reversal information.
3. Ignoring volume. A heavy-volume third candle adds confidence. Light volume on the third bar often precedes failure.
4. Trading short timeframes. Intraday three inside down setups fire constantly. The pattern is far more selective on daily and weekly charts.
5. Stop placement. Putting a stop just above candle 2 is usually too tight. Use the candle 1 high or the prior swing high.

Frequently Asked Questions

What is three inside down in simple terms? It is a three-bar bearish reversal where a small bearish candle fits inside a previous long green candle, then a third candle closes lower and confirms the turn.

How does three inside down affect investment decisions? Traders use it to time exits from longs or to initiate shorts. The 60 percent base rate means it works as a context tool more than a standalone signal. Position sizing should reflect that.

What is a real-world example of three inside down? Several index ETFs printed three inside down patterns at the January 2022 top and again at the August 2022 rally peak before fresh legs lower. The pattern shows up regularly at the end of countertrend rallies in bear markets.

How can investors use three inside down effectively? Pair it with declining momentum on RSI or MACD, with a known resistance level, or with shrinking volume on the first candle. Trade only confirmed patterns on daily and weekly charts.

How is three inside down different from three outside down? Three outside down begins with a bearish engulfing pattern, where the second candle wraps around the first. Three inside down begins with a bearish harami, where the second candle fits inside the first. Outside down is generally a stronger signal.

Sources

1. Bulkowski, T. Three Inside Down Candle Pattern. https://thepatternsite.com/ThreeInsideDown.html
2. Investopedia, Three Inside Up/Down. https://www.investopedia.com/terms/t/three-inside-updown.asp
3. StockCharts ChartSchool, Candlestick Pattern Dictionary. https://chartschool.stockcharts.com/table-of-contents/chart-analysis/candlestick-pattern-dictionary
4. CME Group Education, Candlestick Charting. https://www.cmegroup.com/education/courses/technical-analysis/candlestick-charting.html

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.