Detecting Three Outside Up Candlestick Pattern in Pine Script

Overview of Three Outside Up Candlestick Pattern

The “Three Outside Up” candlestick pattern is a bullish reversal indicator typically found at the end of a downtrend, suggesting a shift in momentum from bearish to bullish. This three-candle pattern starts with a bearish candle, followed by a larger bullish candle that completely engulfs the body of the first candle, indicating a strong buying pressure. The third candle continues this bullish trend by closing higher than the second candle, reinforcing the reversal signal.

Importance in Technical Analysis

importance due to several reasons:

1. Reversal Signal: It is a strong bullish reversal signal. Appearing at the end of a downtrend, this pattern indicates a potential shift in market sentiment from bearish to bullish.
2. Reliability: Compared to many other patterns, the “Three Outside Up” is often considered more reliable. This is because the pattern involves a clear and strong price movement over three days, offering a more robust signal than patterns formed by a single candle.
3. Confirmation Aspect: The pattern provides a form of confirmation. The second candle not only engulfs the first but the third candle’s closure above the second further confirms the bullish trend. This adds to the robustness of the signal.
4. Volume Correlation: When accompanied by increased volume, the pattern’s significance is enhanced. Higher volume during the formation suggests stronger market participation in the reversal, increasing the likelihood of a sustained bullish trend.
5. Easy Identification: The pattern is relatively easy to identify, making it popular among both novice and experienced traders.

Example From Trading View

Defining the Three Outside Up Candlestick Pattern Criteria

The Three Outside Up candlestick pattern is a bullish reversal indicator with specific criteria that define its formation:

1. First Candle: The pattern starts with a bearish candle in a downtrend. This candle typically has a long body, indicating a strong selling pressure, and it sets the stage for the reversal.
2. Second Candle: The second candle is a bullish one that must engulf the body of the first candle. This means the second candle opens below or at the close of the first candle and closes above its open. This engulfing nature suggests a shift in momentum, where buyers are overpowering sellers.
3. Third Candle: The third and final candle of the pattern is also bullish. It should open within or above the body of the second candle and close higher than the second candle’s close. This further confirms the shift in market sentiment from bearish to bullish.

Code For Detecting Three Outside Up

//@version=5
indicator("Three Outside Up", overlay=true)

// Condition for the Three Outside Up pattern
isThreeOutsideUp = open[2] > close[2] and close[1] > open[1] and close[1] >= open[2] and close[2] >= open[1] and close[1] - open[1] > open[2] - close[2] and close > open and close > high[1]

// Create a label for the Three Outside Up pattern
if isThreeOutsideUp
    label.new(bar_index, high, "Three Outside Up", style=label.style_label_down, color=color.yellow,yloc = yloc.abovebar)

Output

Overview of the script 

1. Indicator Declaration

//@version=5
indicator("Three Outside Up", overlay=true)

• //@version=5: This specifies that the script uses version 5 of Pine Script, which is the latest version as of your query.
• indicator(...): This function declares a new indicator. “Three Outside Up” is the name given to this indicator.
• overlay=true: This parameter means that the indicator will be plotted directly on the price chart (overlaying the price action), not in a separate window below the chart.

2. Condition for the Three Outside Up pattern

isThreeOutsideUp = open[2] > close[2] and close[1] > open[1] and close[1] >= open[2] and close[2] >= open[1] and close[1] - open[1] > open[2] - close[2] and close > open and close > high[1]

• isThreeOutsideUp: This is a boolean variable that will be true if the conditions for the Three Outside Up pattern are met, and false otherwise.
• open[2] > close[2]: Checks if the first candle is bearish (opening price higher than closing price two bars ago).
• close[1] > open[1]: Ensures the second candle is bullish (closing price higher than opening price one bar ago).
• close[1] >= open[2] and close[2] >= open[1]: The second candle engulfs the first candle.
• close[1] - open[1] > open[2] - close[2]: The body of the second candle is larger than the body of the first candle.
• close > open: The current (third) candle is bullish.
• close > high[1]: The closing price of the current candle is higher than the high of the previous candle, completing the Three Outside Up pattern.

3. Creating a Label for the Pattern

if isThreeOutsideUp
    label.new(bar_index, high, "Three Outside Up", style=label.style_label_down, color=color.yellow, yloc = yloc.abovebar)

• if isThreeOutsideUp: This line checks if the isThreeOutsideUp variable is true. If it is, the script executes the code inside the if block.
• label.new(...): This function creates a new label on the chart.
  • bar_index: Specifies the x-coordinate for the label (the current bar index).
  • high: Sets the y-coordinate at the high price of the current bar.
  • "Three Outside Up": The text to be displayed in the label.
  • style=label.style_label_down: Sets the style of the label. In this case, it’s a downward-pointing label.
• color=color.yellow: This sets the color of the label to yellow.
• yloc = yloc.abovebar: Positions the label above the bar, ensuring it does not obstruct the view of the candlesticks.

Frequently Asked Questions

Conclusion

This script is designed for detecting the “Three Outside Up” candlestick pattern, a well-known indicator in technical analysis for signaling bullish reversals. By automating the identification of this pattern, the script enhances trading efficiency and accuracy. Its customization options for label appearance allow traders to adapt the visual cues to their specific preferences or chart setup. While tailored for Pine Script version 5, this tool represents a valuable asset for traders looking to integrate candlestick pattern analysis into their trading strategies, reminding users of the importance of corroborating such signals with other technical indicators for more robust trading decisions.