Three Inside Up Pattern: A Nifty Example, Rules and Indian Tax Treatment

What the Three Inside Up Pattern Actually Is

The Three Inside Up is a bullish reversal pattern made of three candles that appears after a visible downtrend. It is the confirmed, three-candle form of the bullish harami. The first two candles form the harami: a long red candle, then a small green candle trapped inside it. The third candle is the proof. It closes higher and tells you the buyers who showed up on day two were serious.

The word inside refers to candle 2 sitting inside the real body of candle 1. The word up refers to candle 3 pushing the close above candle 1. Read together, the pattern says a falling market paused, buyers stepped in quietly, and then the next session those buyers won. That sequence is the whole edge. A single green candle after a fall can be a dead-cat bounce. Three candles in this order are a small story about control changing hands.

Like every candlestick pattern, this is a probability tilt, not a promise. It works better on liquid instruments where price discovery is honest, which on the NSE means index futures, index options, and large-cap cash stocks rather than illiquid small caps where a single large order can fake the shape.

The Three Candles, Rule by Rule

To call something a genuine Three Inside Up and not a lookalike, all three of these must be true in sequence. Skipping any one of them is the most common way traders lose money on a pattern that was never really there.

• Candle 1: a long bearish (red) candle that fits the existing downtrend. It should look like sellers in full control, not a tiny doji.
• Candle 2: a smaller bullish (green) candle whose open and close both sit inside the real body of candle 1. This is the harami. Ideally the green body covers at least the middle of the red body, showing buyers absorbing the selling.
• Candle 3: a bullish (green) candle that closes above the close of candle 1, and stronger setups close above the high of candle 1. This is the confirmation.
• Context: the pattern only counts as a reversal signal if there was a real downtrend before it. The same three candles in the middle of a sideways chop mean little.

A Real Nifty Example with a Date

Generic Rs 100 to Rs 102 examples teach nothing because they ignore how Nifty actually moves in points and how a trade is sized in lots. So here is a worked, realistic illustration on the Nifty 50 daily chart around a real swing low. In early March 2023 the Nifty fell into a corrective low near the 16,800 to 16,900 zone before turning up. The numbers below are illustrative, rounded daily levels in that region used to show the mechanics. They are not a tick-accurate record, and they are not a prediction of any future move.

Read the table. Candle 1 is a long red day: Nifty opens at 17,050 and closes at 16,850, a 200 point fall that fits the downtrend. Candle 2 opens at 16,880 and closes at 16,940. Both numbers sit inside the 16,850 to 17,050 real body of candle 1, so it is a valid harami inside day. Candle 3 opens at 16,950 and closes at 17,110, above the 17,080 high of candle 1. That is a textbook Three Inside Up. The signal fires at the close of day 3.

A disciplined plan from here is mechanical. Entry on a break above the candle 3 high of 17,120, so say a buy trigger at 17,130. Stop loss below the candle 1 low of 16,820, so a stop near 16,790. That is a risk of about 340 Nifty points per unit. The target is the prior swing high or resistance overhead. If price reaches 17,810, that is roughly 680 points of reward against 340 points of risk, a clean 2 to 1 ratio before costs. The point is not the exact levels. It is that the candles define the entry, the stop, and the risk in points, and then you decide whether to trade it in futures or options.

Turning the Signal into a Rupee Trade on Nifty

On the NSE you express that bullish view with the current Nifty lot size of 65. Suppose after the Day 3 signal you buy one lot of a near-the-money Nifty weekly call, say the 17,100 call, at a premium of 120 points. The premium outlay is 120 times 75, which is Rs 9,000 plus costs. If Nifty rallies as planned and the call rises to 200 points, you exit at 200 times 75, which is Rs 15,000. The gross profit is 80 points times 75, or Rs 6,000, before costs and taxes. These are illustrative figures, not a forecast, and options can also expire worthless if the move does not come.

Costs are not optional on the NSE, so put them in. On options, STT is 0.15 percent on the sell side of the premium. Selling 65 units at 200 is a premium value of Rs 13,000, so STT is about Rs 20. A discount broker charges a flat fee, often Rs 20 per order, so roughly Rs 40 for the round trip. Add exchange transaction charges, SEBI fee, GST at 18 percent on brokerage and transaction charges, and stamp duty on the buy side. For a single Nifty options lot the all-in cost is usually in the Rs 80 to Rs 120 range. So a gross Rs 5,200 profit becomes about Rs 5,080 to Rs 5,120 net before tax. Thin scalps die on these costs. A pattern with real follow-through survives them.

A Cash-Market Example on a Large-Cap Stock

The pattern is not only for indices. Take a liquid large cap like Reliance Industries on a daily chart during a pullback. Suppose, illustratively, the stock falls and prints candle 1 from 2,460 down to 2,400 (a long red day), then a quiet inside green candle from 2,410 to 2,440, then a strong green candle that opens at 2,445 and closes at 2,490, above the candle 1 high of 2,468. That is a Three Inside Up in the cash segment. Entry above 2,490, stop below the candle 1 low of around 2,395.

If you buy 100 shares at 2,495 and the stock runs to 2,620, the gross gain is 125 points times 100 shares, or Rs 12,500. Because this is delivery, STT is 0.1 percent on both buy and sell, brokerage on delivery is often zero at discount brokers, and you still pay exchange charges, GST and stamp duty, totalling a small fraction of the trade. If you hold under one year, the gain is short-term capital gains taxed at 20 percent. If you hold longer than a year, it is long-term capital gains at 12.5 percent on the amount above Rs 1.25 lakh per year. Numbers are illustrative and not a recommendation to buy Reliance.

Three Inside Up Versus Similar Patterns

Traders confuse this pattern with several cousins that look alike on a quick glance. Knowing the exact difference stops you from acting on the wrong signal. The table below lays out the key bullish reversal patterns side by side.

The cleanest way to remember it: a bullish harami is the setup, and the Three Inside Up is that same setup with a third candle that confirms it. The Three Outside Up starts with an engulfing instead of a harami, so candle 2 wraps around candle 1 rather than hiding inside it. If candle 2 breaks out of candle 1 body, you do not have a Three Inside Up at all.

Why Volume Confirms or Kills the Pattern

Volume is the lie detector for this pattern. The ideal sequence shows heavy selling volume on candle 1, lighter volume on the small candle 2 (sellers exhausting, buyers testing), and clearly higher volume on candle 3 as buyers commit. Rising volume on the confirmation candle is the single most useful filter you can add on Indian charts.

When candle 3 closes higher but on thin volume, treat the signal with suspicion. A low-volume bounce in a falling stock often gets sold into within a day or two. On indices like Nifty and Bank Nifty you can cross-check with futures volume and open interest. A reversal candle backed by rising volume and a fall in put-heavy open interest is a far more trustworthy bottom than a quiet drift up.

• Want to see candle 3 volume above the average of the prior few sessions.
• Be cautious if the confirmation comes on a holiday-thinned or expiry-day session, where volume is distorted.
• On stocks, check that delivery volume, not just intraday churn, is supporting the move.

Where the Pattern Works Best on NSE and BSE

Context decides whether this pattern is a gift or a trap. The Three Inside Up is most reliable when it forms at a place the chart already respects: a prior swing low, a rising 50-day or 200-day moving average, a round number like Nifty 17,000, or a well-tested support zone. A bullish reversal candle that also sits on support is two signals agreeing, which is much better than one signal alone.

It is least reliable in a strong, fast downtrend with no support nearby, during news-driven gap days, and in illiquid counters where a few orders distort the candles. Indian expiry mechanics matter too. On weekly options expiry days and around monthly expiry (the last Tuesday of the month, or the prior day if Tuesday is a holiday), index candles can whip around because of unwinding rather than genuine direction, so a pattern that forms purely from expiry flows can mislead you.

Entry, Stop Loss and Position Sizing

The pattern hands you a clean, mechanical trade plan, which is its biggest practical benefit. Your entry is a break above the candle 3 high. Your stop is below the candle 1 low, which is the point where the bullish thesis is simply wrong. The distance between those two is your risk per unit, and every other number flows from it.

Position sizing is where most retail accounts on the NSE blow up, so use the percent-risk rule. Decide that any single trade may only lose 1 to 2 percent of your capital. If your capital is Rs 5,00,000 and your risk cap is 1 percent, you may lose Rs 5,000 on this trade. In the Nifty example, risk per lot from the 17,130 entry to the 16,790 stop is about 340 points, which on 65 units is roughly Rs 22,100 of risk for one futures lot. That is far above Rs 5,000, so a futures lot is too big for that account on a stop that wide. A defined-risk option spread, or simply buying one call where the maximum loss is the Rs 7,800 premium, fits the risk budget far better.

• Entry: stop or limit buy just above the candle 3 high.
• Stop loss: just below the candle 1 low, the level that invalidates the pattern.
• Risk per unit: entry minus stop, in points, times the lot or share quantity.
• Size: choose quantity so total risk is at most 1 to 2 percent of capital.
• Target: nearest prior swing high or resistance, aiming for at least 1.5 to 2 times the risk.

Taxes and Costs in India You Must Account For

Your screen shows gross profit. Your bank account sees net. The gap is STT, brokerage, exchange and SEBI charges, GST and stamp duty, and then income tax. On delivery equity bought on a Three Inside Up, gains held under a year are short-term capital gains at 20 percent, and gains held over a year are long-term capital gains at 12.5 percent on the part above Rs 1.25 lakh in a financial year. STT on delivery is 0.1 percent on both buy and sell.

If you trade the pattern through intraday equity or F&O, the profit is treated as business income and taxed at your normal income tax slab rate, not at the flat capital gains rates. STT on options is 0.1 percent on the sell-side premium, and on futures it is 0.02 percent on the sell value. GST at 18 percent applies on brokerage and on transaction charges, not on your whole turnover. For active option buyers these costs are small per trade but add up fast across many trades, which is exactly why a pattern needs genuine follow-through to be worth taking. None of this is tax advice; confirm current rates with a qualified professional and the NSE before you trade.

Common Mistakes That Turn a Good Pattern into a Loss

Most failures with the Three Inside Up are not the pattern being wrong. They are the trader skipping a rule. The mistakes below show up again and again in real Indian retail trading journals.

• Trading the harami alone without waiting for candle 3 to confirm. Two candles are a setup, not a signal.
• Ignoring the downtrend requirement and seeing the pattern in sideways chop where it has no meaning.
• Taking the signal on thin or expiry-distorted volume, where the bounce is mechanical rather than real demand.
• Setting the stop loss too tight, inside the pattern, so normal noise knocks you out before the move.
• Oversizing because the chart looks obvious, then losing far more than 2 percent on the one time it fails.
• Forgetting costs and taxes, so a small gross gain becomes a net loss after STT, GST and slab tax.

Confirm with at least one other tool before you commit. A close back above a moving average, an oversold RSI turning up, or support holding underneath all add weight. The pattern is a trigger; your edge comes from only pulling that trigger when the wider chart agrees.

Sources and Further Reading

For authoritative data and further reading, refer to Zerodha Varsity, Investopedia and NSE India. Always confirm current contract sizes, STT rates and tax rules on the official source before you trade. The price levels in this guide are illustrative and are not a recommendation or a forecast.

Sources and Further Reading

For authoritative data and further reading on this topic, refer to Zerodha Varsity, Investopedia and NSE India. Always confirm current rules, rates and contract specifications on the official source before you trade.