Like 2 position dwarfs, 3 position dwarfs are used to control movements from a siding to a mainline or from mainline to a siding or from a mainline to mainline.
The distinguising feature of a 3 position dwarf is that it can show a yellow light "low speed caution" in addition to green, "clear low speed" and red, "stop" however the vast majority of 3 position dwarfs, can only show "low speed caution" yellow or "stop" red or purple.

Because light 2 and 3 position dwarfs look identical, confusion arises when a green is displayed. A green on a 2 position dwarf can be displayed when the track is occupied, a green on a 3 position dwarf informs the driver that the track is clear. It is of the utmost importance that a driver know if he is looking at a 2 or 3 position dwarf signal, this information only comes from a signal diagram and local route knowledge.

Purple was used in many dwarfs to avoid the red light in a dwarf being confused with a red hand signal in shunting yards. In later years red became the normal colour used for the stop indication until the 1990's when for reasons that are not clear, purple was again used. Interestingly when signals were displayed with LED's the"purple" light looks like a blue light.

Kensington 2005
It is important not to get confused between a 3 position dwarf and how many aspects it can show. Although this dwarf is a 3 position dwarf it can only show 2 aspects, yellow "low speed caution" and red "stop"

Sydenham, Dec. 2005
Another 3 position dwarf than can only show 2 aspects, this dwarf, shown at "low speed caution" controls movements out of the suburban stabling siding onto the mainline, (either platform) it works in conjunction with the derail

North Melbourne stabling siding, Dec. 2005
This 3 position dwarf controls movements out of the siding onto the mainline. This is a searchlight type signal, with these signals the red changes to a yellow instead of other light dwarfs on this page that use 2 separate lights.

These dwarfs were for movements onto the hump. The round "signals" with 7 white lights were unique hump signals that acted like hand signals from the hump operator. When the lights were horizontal it indicated "stop" when the lights were vertical it indicated to approach the hump at normal shunting speed (max 10 mph) when the lights were at 45 degrees, as shown in the photo, it indicated to the crew to go to humping speed (1.5 MPH) When the horizontal lights flashed it mean "back up" These lights were duplicated in the cab of the H class locos
Photo courtesy Colin McKee

Malvern, Feb. 1982
Another 3 position dwarf that could only show 2 aspects. This dwarf controlled movements from the Malvern goods yard onto the down Caulfield local line.

Westall, Jan. 2006
Very few dwarfs are equipped with a train stop but this one that takes you from the up line to the down line at Westall has one, probably to protect against the possibility of a wrong line move.

Nth Melb wash plant, Jan. 2006
Most dwarfs apply only from one track, but the dwarf on the left applies out of the 2 tracks shown here, a sign reminds drivers of this. The traffic light type signal on the right is for the wash plant operator to communicate with the driver.