Three Inside Up: Confirmed Harami Bullish Reversal

Key Takeaways

• Three inside up adds a confirming up-close to a bullish harami, turning the warning into an action signal.
• Bulkowski's testing of three inside up shows it reverses 65 percent of the time, ranking 23 of 103 candle patterns.
• The most common error is using it inside a sideways range, where the prior downtrend rule is missing.
• Best results come after a downward pullback within a longer uptrend, not at a fresh secular low.

What It Is

Three inside up is a three-bar candlestick pattern documented by Gregory L. Morris and later studied in detail by Thomas Bulkowski. The first bar is a long bearish candle inside a downtrend. The second bar is a small bullish candle that sits inside the first body, forming a bullish harami. The third bar closes above the second bar's close, confirming the reversal.

Without that third up-close, you have only a bullish harami. The third candle is what upgrades the signal.

The Intuition

A long red candle tells you sellers are still in charge. The next session opens higher, drifts sideways, and closes inside the prior body. That alone signals seller exhaustion, but not yet buyer commitment. The third candle is the proof: a higher close that takes price above the harami high.

Read it like a three-act play. Act one is the downtrend extending. Act two is sellers pausing. Act three is buyers stepping in firmly enough to close above the prior bar.

How It Works

Identification rules:

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

trend       = down
body_1      = bearish, long
body_2      = bullish, inside body_1
close_3     > close_2

Some practitioners require candle 3 to close above candle 1's open as well, which is a stricter and stronger version of the signal.

Worked Example

A stock has fallen from 50 to 40 over three weeks. Monday it prints a long red candle from 41 to 39. Tuesday it opens at 39.40, trades quietly, and closes at 40.10. Tuesday's body, 39.40 to 40.10, sits inside Monday's 39 to 41 body. That is a bullish harami.

Wednesday opens at 40.20 and closes at 41.30, above Tuesday's 40.10 close and above Monday's 41 open. Three inside up is now complete.

A trader entering near the Wednesday close at 41.30 might place a stop below the harami low at 38.90, giving 2.40 of risk per share. A 2:1 target sits near 46, inside a previous resistance band.

Common Mistakes

1. Acting on the harami alone. Without the third bar's higher close, you are trading a harami, not three inside up. Statistics for the two patterns differ.
2. Ignoring the prior trend. The pattern requires a downtrend. In a sideways range the reversal interpretation does not apply.
3. Skipping volume. Most reliable signals show declining volume on candle 1 and rising volume on candle 3. Volume confirmation tightens the edge.
4. Trading micro timeframes. Five-minute three inside up patterns fire often and fail often. Daily and weekly bars are far more selective.
5. Setting stops too tight. Many real reversals retrace into the harami before working. A stop just below candle 2 is often too aggressive. Use the candle 1 low or the prior swing low instead.

Frequently Asked Questions

What is three inside up in simple terms? It is a three-bar bullish reversal where a small bullish candle fits inside a previous long red candle, then a third candle closes higher and confirms the turn.

How does the three inside up pattern affect investment decisions? Traders use it to time entries into oversold names. After the third candle confirms, you can buy near the close with a stop below the harami low. Position sizing should account for the 65 percent base reversal rate.

What is a real-world example of three inside up? Many stocks printed this pattern at the March 2009 bottom and at the late March 2020 COVID lows. The pattern shows up regularly inside healthy uptrends after a short pullback.

How can investors use three inside up effectively? Filter for the prior trend, confirm with volume on the third candle, and combine with support levels or oversold oscillator readings. Avoid acting before the third bar closes.

How is three inside up different from three outside up? Three outside up starts with a bullish engulfing pattern, where the second candle wraps the first. Three inside up starts with a harami, where the second candle fits inside the first. Outside up tends to be the stronger setup statistically.

Sources

1. Bulkowski, T. Three Inside Up Candle Pattern. https://thepatternsite.com/ThreeInsideUp.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.