Three Inside Up and Down — Harami with confirmation

A Harami on its own only tells you the trend has hesitated. Three Inside Up and Three Inside Down go one step further: they add a third candle that has to confirm the market really has turned, not just paused for breath. That third candle is what separates both patterns from a plain Harami, and it is the reason many traders wait for it before entering a position.

What are the Three Inside Up and Three Inside Down patterns?

They are three-candle Japanese reversal patterns from the candlestick tradition Steve Nison brought to Western traders. Each one is simply a Harami completed by a confirming candle. Three Inside Up is a bullish reversal: candles 1 and 2 form a Bullish Harami, and candle 3 closes above the high of candle 1. Three Inside Down is the mirror image, a bearish reversal: candles 1 and 2 form a Bearish Harami, and candle 3 closes below the low of candle 1.

The logic is straightforward. The first candle strongly continues the trend. The second, much smaller, sits inside the body of the first and signals that momentum has stalled. The third candle settles the argument: if it closes on the opposite side of the level set by the first candle, you have confirmation of a reversal; if not, the pattern is incomplete and gives no signal. It helps to recall how the underlying bullish and bearish Harami pattern works, since it is the core of both setups.

How do you identify the setup on a chart?

You look for Three Inside Up after a clear downtrend, and Three Inside Down after an uptrend — with no existing trend there is nothing to reverse. The three candles line up in order. Candle 1 has a large body in the direction of the trend. Candle 2 is small and fits inside candle 1; that is the classic Harami, a moment of indecision. Candle 3 is then a large body pointing toward the reversal, with a close that breaks through the level of candle 1.

"The more confirming signals you get from a candle, the more reliable the reversal it is predicting becomes." — Steve Nison, Japanese Candlestick Charting Techniques, New York Institute of Finance, 2001

The most common mistake is confusing confirmation with merely touching a level. Candle 3 must close above the high (Up) or below the low (Down) of candle 1 — a wick that only reached there and pulled back is not enough. The second mistake is accepting a candle 2 whose body extends beyond candle 1: then there is no Harami, and so no Three Inside either.

What does it look like in an example?

Let us walk through a hypothetical Three Inside Up on EUR/USD; the numbers are illustrative and only show the mechanics. The market has been falling for several sessions. Candle 1 is a strong bearish candle. Candle 2 is a small bullish candle whose body sits inside candle 1, so the Bullish Harami is complete. Candle 3 then closes above the high of candle 1 — and that close confirms the reversal.

Where do you place the entry, stop-loss and target?

You open the entry only after candle 3 closes, or on a break above its high (Up) or below its low (Down). The reason is simple: while candle 3 is forming you do not know where it will close. The stop-loss goes on the opposite side of the setup — below the low of candle 1 for Three Inside Up, above its high for Three Inside Down. If price returns there, the whole premise of the pattern no longer holds.

Set the target using prior market structure — the nearest support or resistance, a previous high or low, or the Fibonacci retracements of the preceding move. A sensible reward-to-risk ratio starts at roughly two to one; if the nearest barrier sits right next to your stop, skip the setup rather than force it. Many traders also add an indicator filter, such as an oversold or overbought RSI reading, as a secondary check.

Does confirmation by the third candle actually help?

Yes, but at a cost. By waiting for candle 3 to close, you filter out some of the false signals where a Harami looked promising but the market resumed its trend. In return you give up some opportunities: once candle 3 has closed, price has already moved toward the reversal, so you enter later and at a worse price than someone who took the bare Harami. Put plainly, you trade a few missed entries for fewer hits into traps.

This is the classic trade-off between precision and frequency. Three Inside gives stronger, better-confirmed entries, but there are fewer of them. A plain Harami or the bullish and bearish Engulfing pattern react faster but are wrong more often. Which variant you choose depends on whether you value the quality of a single signal or how often signals appear.

How do you tell Three Inside apart from similar patterns?

Its closest cousin is the Three Outside Up and Down setup, where the core is an Engulfing rather than a Harami, with candle 3 confirming an already stronger starting signal. Do not confuse Three Inside with patterns built from three consecutive candles of the same colour, such as three black crows or three white soldiers — those describe an accelerating trend, not a reversal. The same confirmed-bottom logic drives the morning star pattern, though its middle element is a gap rather than a Harami.

What to do tomorrow

1. Open a daily or four-hour chart and find at least three historical occurrences of Three Inside Up or Down — each time check that candle 3 genuinely closed above the high or below the low of candle 1, rather than merely brushing it with a wick.
2. Before you open any position on this pattern, verify two conditions: a complete Bullish or Bearish Harami on candles 1 and 2, and a close of candle 3 through the relevant level; entering before candle 3 closes is the most common mistake, so wait for the session to end.
3. Set the stop-loss on the opposite side of candle 1 before you enter, then measure the distance to the nearest support or resistance to judge whether the reward-to-risk ratio is at least two to one — if not, skip the setup rather than forcing the trade.
4. Add a dedicated Three Inside column to your trading journal and record whether RSI was below 30 (Up) or above 70 (Down) at the signal; after twenty logged trades, review whether that filter really improves your win rate on the specific markets you trade.
5. Read the candlestick chapters in the technical analysis section at ForexMechanics.com to place Three Inside in the wider context of other reversal and continuation setups before you rely on it in live trading.