Three Inside Up Pattern: A Harami That Waits for Proof

Most candlestick signals ask you to trust a single bar. The three inside up pattern is a little more patient. It takes a bullish harami, a two-candle hint that selling is drying up, and then waits one more session for the buyers to prove it. That extra day is the whole point. On a busy Indian midcap chart, where one green candle after a fall means very little, a pattern that demands confirmation is worth knowing well.

We will go through how the three candles are built, what each one says about who is in control, how traders typically enter and place stops, what the published testing says about its reliability, and where it tends to fail. All the prices in the worked example are hypothetical.

What the three inside up pattern looks like

According to Investopedia’s description of the three inside up/down patterns, the bullish version needs four conditions:

1. The market is in a downtrend, or at least a move lower.
2. The first candle is a red (down) candle with a large real body.
3. The second candle is a green (up) candle with a small real body that opens and closes within the real body of the first candle.
4. The third candle is a green candle that closes above the close of the second candle.

Thomas Bulkowski’s identification guidelines on ThePatternSite say the same thing in slightly different words: a tall black candle in a downward price trend, then a small-bodied white candle whose body sits inside the prior body, then a white candle that closes above the prior close. He adds one detail that matters when you are squinting at a real chart. The tops or the bottoms of the two bodies can be at the same price, but not both.

If the first two candles look familiar, they should. They are a bullish harami. Bulkowski describes the three inside up as a bullish harami with a confirming candle as the third day, and credits Morris with creating the pattern. Investopedia makes the same link: the three inside patterns are essentially harami patterns followed by the confirmation candle that many traders wait for anyway.

Reading the three candles one at a time

The pattern is easier to trust when you understand the story each candle tells. Here is how it usually plays out.

Candle one: sellers in full control

The downtrend carries on with a big red body. Investopedia’s write-up of the trader psychology puts it simply: the first candle is a large sell-off posting new lows, which discourages buyers and makes sellers confident. Nothing about this candle is bullish. It is the setting, not the signal.

Candle two: the fall stalls

The second candle opens inside the first candle’s range and, instead of following through lower, closes higher than its own open and higher than the previous close. Its body is small and tucked inside the big red body. In Investopedia’s words, this price action raises a red flag that may make some short-term short sellers cover.

On its own, this is still only a harami. Plenty of haramis appear mid-decline and the fall simply resumes the next morning. That is why the third candle exists.

Candle three: buyers follow through

The third candle is green and closes above the second candle’s close. Investopedia describes this as completing a bullish reversal, trapping remaining short-sellers and attracting those who want to go long. The requirement is modest: a close above candle two’s close, not above candle one’s open. Some traders prefer to see the third candle clear the top of the first candle’s body too, but that is a personal filter, not part of the definition.

The third candle does not make the pattern clever. It just stops you from acting on a harami that the market never confirmed.

A worked example with hypothetical prices

Say a stock has slid from ₹620 to around ₹540 over three weeks. These are made-up numbers for illustration only.

• Day 1: opens at ₹548, trades down to ₹524 and closes at ₹526. A large red body of ₹22.
• Day 2: opens at ₹529, trades between ₹527 and ₹539, closes at ₹535. A small green body from ₹529 to ₹535, sitting entirely inside Day 1’s body of ₹526 to ₹548.
• Day 3: opens at ₹536, trades between ₹533 and ₹551, closes at ₹549. Green, and the close of ₹549 is above Day 2’s close of ₹535.

Check it against the rules. A downtrend into the pattern: yes. A big red first body: yes. A small green second body inside the first: yes, ₹529 to ₹535 is within ₹526 to ₹548, and neither the top nor the bottom matches. A green third candle closing above the second close: yes. The pattern is complete at the Day 3 close.

Now the trade, if you choose to take one. Investopedia notes that a long position can be entered near the end of the day on the third candle or at the following open, with a stop below the low of the third, second or first candle depending on how much risk the trader will accept. Using our numbers:

• Entry at ₹549, stop below the Day 3 low of ₹533 (say ₹532): risk of ₹17 a share.
• Entry at ₹549, stop below the Day 1 low of ₹524 (say ₹523): risk of ₹26 a share.

The wider stop is less likely to be shaken out by noise, but it costs more per share. If your rule is to risk ₹5,000 on a trade, the tighter stop lets you buy 294 shares (₹5,000 divided by ₹17, rounded down), while the wider one allows 192 shares (₹5,000 divided by ₹26, rounded down). Same pattern, same entry, very different position size. This is where a proper technical analysis process earns its keep: the stop decides the size, not the other way round.

Where to take profit

This is the awkward part. Investopedia states plainly that these patterns do not have profit targets, so you need another method to decide when to take profits, such as a trailing stop. A few practical options:

• The nearest resistance. The last swing high before the decline, or the zone where the fall accelerated, is a natural first target.
• A multiple of risk. With ₹17 of risk, a 2:1 target sits ₹34 above entry at ₹583. That only makes sense if the chart has room to get there before hitting resistance.
• A trailing stop. Move the stop up under each new higher low, or under a short moving average, and let the market take you out.

Whatever you pick, decide it before entering. A pattern with no built-in target tempts people to hold on hoping for more, which is exactly how small winners turn into losses.

How reliable is the three inside up pattern?

Bulkowski’s testing gives a sober answer. On his three inside up page, he reports that the pattern acted as a bullish reversal 65% of the time in his tests, and he calls that a respectable reversal rate. The 65% here is the share of tested patterns where price broke out upward and reversed the prior downtrend, not a win rate for any particular trading rule.

A few other figures from the same page, with what they mean:

• Overall performance rank of 20 out of 103 candlestick patterns, where 1 is the best performer.
• Frequency rank of 31 out of 103, so it is reasonably common but not one you will see on every chart.
• 60% met the price target in the best of his four market and breakout combinations, which was a bull market with an upward breakout.

Bulkowski also notes that these numbers are based on hundreds of perfect trades. Real trades are not perfect. Slippage, gaps at the open and your own hesitation all eat into the edge, so treat the statistics as a ceiling rather than a promise.

A pattern that reverses the trend about two times in three is useful. It is also wrong about one time in three, and your stop has to be ready for that.

When the pattern works better

Bulkowski shares three tips from his book on candlestick charts, and they are worth taking seriously:

• Three inside up patterns that appear within a third of the yearly low perform best.
• Patterns within a third of the yearly high tend to act as reversals most often.
• Trade the pattern during a downward retracement of the primary uptrend.

Investopedia points the same way. It suggests using the three inside up during a pullback in an overall uptrend, and says the patterns are most reliable in high-volume trading and when they follow a pronounced trend.

Put together, the ideal setup on an Indian chart looks like this: a stock in a healthy longer-term uptrend has a sharp few-day pullback, often into a rising moving average or a prior support level, and the three inside up forms right there with the third candle on better volume. That is a pullback ending, which is a much easier trade than calling the bottom of a long bear trend.

Confirming the signal with indicators

Investopedia lists RSI, moving averages, volume, MACD and the stochastic oscillator as indicators traders often use to confirm these patterns. In practice we would keep it to one or two checks rather than stacking all five:

• Volume: is the third candle’s volume higher than the second’s? Buyers showing up in size is the most direct confirmation.
• RSI: did RSI dip toward oversold during candle one and turn up by candle three? A bullish divergence, where price makes a lower low but RSI does not, adds weight.
• Moving average: is the pattern forming at or just above a widely watched average in a stock that is trending up overall?

If none of these line up, the pattern is just three candles. That is not a reason to buy.

Common mistakes with this pattern

• Ignoring the trend before it. A three inside up in a sideways, choppy range has nothing to reverse. The definition needs a move lower first.
• Accepting a weak second candle. If the second body pokes outside the first body, it is not a harami, and the pattern does not qualify.
• Entering on candle two. Buying the harami and calling it a three inside up in advance defeats the purpose. Wait for the close of the third candle.
• Skipping the stop. Bulkowski’s own example on his page shows price moving up after the pattern, forming a triple top and then falling sharply. Reversals fail, and a stop under the pattern is your insurance.
• Treating it as a long-term call. Investopedia describes these as short-term patterns that may not always produce a significant trend change. It is a swing-trading tool, not a reason to hold a stock for years.

Its mirror image: three inside down

Flip everything and you get the three inside down. Investopedia describes it as forming in an uptrend: a large green candle, then a small red candle whose body sits inside the first, then a red candle that closes below the second candle’s close. The logic is the same, just with buyers losing control. If you trade both directions, learn them as a pair.

How it fits with related patterns

The three inside up sits in a family of bullish reversal signals that differ mainly in how much confirmation they ask for:

• The bullish harami is the two-candle core with no confirmation.
• The harami cross replaces the small second body with a doji.
• The morning star is another three-candle bullish reversal that traders often compare with this one, though its middle candle is built differently.

Knowing the differences stops you from forcing every three-candle cluster into a pattern it does not quite fit.

A simple checklist before you act

1. Is there a clear move lower into the pattern, ideally a pullback inside a bigger uptrend?
2. Is candle one a large red body?
3. Is candle two a small green body fully inside candle one’s body, with not both ends matching?
4. Did candle three close green and above candle two’s close?
5. Does volume, RSI or a moving average support the turn?
6. Have you set the stop below the pattern and sized the position from it?
7. Do you know where you will take profit, given the pattern has no target of its own?

If you can tick all seven, you have a setup worth considering. If you are fudging two or three of them, let it go. Another chart will give you a cleaner one soon enough.

Disclaimer: This article is for education only and is not investment advice. All prices, trades and position sizes in it are hypothetical examples. Trading involves the risk of loss; consult a SEBI-registered investment adviser before acting.