Three outside up and down: engulfing plus a follow-through day

Three outside up and three outside down extend the engulfing pattern by one day. First comes an engulfing pair: a candle whose real body completely covers the previous candle's body in the opposite color. Then a third session closes further in the engulfing candle's direction. The engulfing day says control changed hands; the third day says the new side kept it, at least for one more close.

After a decline, a red candle swallowed by a larger green one and followed by a higher close is three outside up. After a rally, a green candle swallowed by a red one and followed by a lower close is three outside down. TA-Lib's CDL3OUTSIDE handles both and returns +100 or −100.

This is a very different animal from the star patterns on neighboring pages. It is simple, it has no settings quirk in Finabase, and it is common: 994 detections in our two-year sample. Below are the rules (including one TA-Lib omission that surprises most people), two real cases from 2025, and the test results.

Anatomy of the pattern

For three outside up:

1. A red candle continues the decline. In TA-Lib it can be any size.
2. A green engulfing candle. It opens below the red candle's close and closes above the red candle's open, so its body covers the first body completely. Shadows are ignored.
3. A higher close. The third session closes above the second session's close.

For three outside down, a green candle is engulfed by a red one and the third session closes below the red candle's close.

The name mirrors Three inside up and three inside down: the confirmed harami. There, the second candle sits inside the first. Here, the second candle reaches outside the first on both ends.

The exact rules Finabase uses

Finabase uses TA-Lib's CDL3OUTSIDE function. It has no candle settings at all, no averages, and no lookback beyond the three candles themselves:

The sign is the second candle's color: green engulfing gives +100, red gives −100.

Three differences from how most books describe the pattern:

• No size requirement. Classic engulfing patterns call for a small first body and a large second one. TA-Lib's three outside accepts two tiny candles as long as the second body strictly covers the first. This is the main reason the pattern is so common.
• The third candle's color is free. A red third candle that opens on a big gap up and falls, but still closes above the second close, counts as three outside up. The Broadcom example below is exactly that.
• No trend test. The source comment says the pattern "must appear" in a downtrend (up version) or uptrend (down version) but that the function does not check. In our data only 26.2% of three outside up patterns followed a 10-session decline.

What the three candles say

The engulfing day is the headline. For three outside up, the session opens below the prior close, sellers apparently in charge, and then buyers lift it all the way through the previous body. Everyone who sold during the first candle, and everyone who sold at the second candle's open, is now underwater.

The third day answers the obvious objection: was that a one-day squeeze? A further higher close says the demand did not disappear overnight. It is a modest test, since one more close in the same direction is common in any market, but it filters out engulfing days that are immediately reversed.

Because neither TA-Lib nor the pattern itself cares about size, much of the information comes from things the detector ignores: how large the engulfing body is compared with recent candles, how much volume came with it, and where on the chart it happened.

Confirmation beyond the third day

Traders who want more than the built-in third candle tend to check:

• A close beyond the third candle's extreme: above its high for the bullish version, below its low for the bearish one. Our test uses this rule.
• The size of the engulfing body compared with the previous 10 candles. A large engulfing body says more than a narrow one.
• Volume on the engulfing day well above average.
• Location at support or resistance, and momentum readings such as the Relative Strength Index (RSI): how to read and use it.

Two real cases from 2025

Broadcom, April 8, 2025 (three outside up, worked). Broadcom had fallen 17.1% in ten sessions during the April 2025 tariff sell-off. April 4 was a red candle, $148.17 to $146.29. On April 7 the stock opened lower at $144.49 and closed at $154.14, engulfing the prior body. On April 8 it opened sharply higher at $167.62, faded all day, and closed red at $156.03. Because that close was above April 7's close, TA-Lib counted the pattern. The next day, April 9, when the US announced a pause on most of the new tariffs, Broadcom closed at $185.15, up 18.7%. Ten sessions after the pattern it was 13.4% higher.

A note of honesty about this one: the result was driven by a policy announcement, not by anything the candles could know, and the third candle itself was a weak-looking red day. It counts as a success in the statistics either way.

UnitedHealth, August 26, 2025 (three outside down, failed). UNH had rallied 14.9% in ten sessions. On August 22 it closed green at $307.42; on August 25 it opened above that at $308.49 and closed below the August 22 open, at $304.86, a bearish engulfing; on August 26 it closed lower again at $300.43. The pattern never confirmed with a close below the third candle's low. Five sessions later UNH was 2.5% higher, and ten sessions later it was up 15.4%, trading as high as $351.71.

What the data says

The test covered daily bars from October 30, 2024 to October 29, 2026 for 60 large US stocks and ETFs (29,760 day-samples). Hits are closes in the pattern's direction five sessions later. The baselines are the shares of all days followed by a higher (53.1%) or lower (46.7%) close.

Confirmed cases are measured from the confirmation close, the first point at which a trader waiting for it could have acted. Returns are price changes, so a positive number after the bearish pattern means prices rose.

Both sides beat their baselines by about two to three points over five sessions. That is a small margin, but these are the largest samples in this group, so it is less likely to be pure noise than a similar gap on 50 cases. The ten-session averages tell a less flattering story for the bearish side: after three outside down, stocks rose 1.31% on average over ten sessions.

The confirmed rows are the sobering part. Once you wait for a close beyond the third candle and enter there, the hit rates drop to 49.2% (up) and 46.5% (down), at or below the baseline. As with several other patterns, the modest edge seems to sit in the first day or two, before most traders would act on extra confirmation.

Three outside versus similar patterns

An educational outline for trading it

This outline shows how traders commonly use the bullish version; the bearish version mirrors it. It is not a recommendation, and the figures are illustrative.

1. Size the engulfing day yourself. TA-Lib won't. A large green body compared with recent candles carries more weight than a narrow one.
2. Check where it happened. A decline into a known support level is the classic setting.
3. Decide the entry: at the third candle's close, or after a further close above its high.
4. Place invalidation under the engulfing candle's low, the point where buyers first took control.
5. Size the position from that distance.

How Finabase shows three outside up and down

• Charts. Add Three Outside Up/Down (CDL3OUTSIDE) to a chart to mark the third candle of every detection. On an active stock you will see many of them; the pattern is common because TA-Lib applies no size test.
• Scanner. The candlestick scanner sorts detections by the sign of TA-Lib's output: three outside up (+100) on the Bullish list, three outside down (−100) on the Bearish list.
• Signals tab. The Candlestick gauge on a symbol's Signals tab (AAPL, for example) gives each of the 61 patterns one vote from its most recent detection in the last eight bars. Because three outside fires so often, it is frequently one of the votes behind the gauge's reading.

Frequently asked questions

What is the difference between bullish engulfing and three outside up?

One day. Three outside up is a bullish engulfing pair followed by a higher close. The extra day filters out engulfing patterns that reverse immediately.

Does the third candle have to be green for three outside up?

Not in TA-Lib. It only has to close above the second candle's close. A red third candle that opened on a large gap up can still qualify, as Broadcom's did on April 8, 2025.

Why does Finabase show so many three outside patterns?

TA-Lib's version has no size requirement, so any pair of candles where the second body strictly covers the first, followed by one more close in that direction, qualifies. Our sample had 994 of them in 29,760 daily bars.

Is three outside more reliable than three inside?

Not on our data. Three inside up beat its baseline by more (61.9% versus 53.1%) than three outside up did (55.9%). Neither held its edge when measured from a later confirmation close.

Summary

Three outside up and down are an engulfing pair plus one more close in the same direction. TA-Lib's version is stripped down to the bare relationships of opens and closes, with no size or trend tests, which makes it one of the most frequent patterns Finabase reports. In our two-year test both sides beat their baselines by two to three points over five sessions, but neither edge survived waiting for a further confirmation. If you use it, supply the judgment TA-Lib leaves out: the size of the engulfing day, the trend before it, and the level where it happened.