Outside Bar Trading A Dive Into The Outside Bar Candlestick Pattern

Our platform, its features, capabilities, and market data feeds are provided ‘as-is’ and without warranty. After several days, the price opens lower (the large green candlestick) with some more downside (lower shadow) which originally would have had the candlestick red. That helps bring in sellers and gives confidence to those who are already short. Bull flags and bear flags are among the most popular chart patterns and especially trend-following traders should study those common trend…

The figure below shows a long setup that becomes invalid as the bearish Outside Bar managed to carry through with momentum. It’s also important to monitor the trade and adjust your stop-loss orders as needed. For example, if the trade moves in your favor, you might want to adjust your stop loss order to lock in some profits. You should aim to risk no more than 1-2% of your trading account on any given trade.

• This strategy focuses on using outside bars to recognize the resumption of the prevailing trend rather than a reversal.
• However, it is almost always unwise to enter on a breakout of a 5 minute outside bar, especially if the outside bar is large, because of the greater risk that the distant stop entails.
• Traders using this strategy focus on the relationship between the current outside bar and the previous candle to gauge market sentiment and potential price direction.

For example, a stock may make a small move higher on the first day, then climb even higher on the second day before falling sharply below the first day’s low by the second day’s end. This demonstrates that the bulls had control of the market before the bears took meaningful control, indicating a shift in the overall trend. The outside bar candlestick pattern can also be used to trade trend continuations. This happens when the trend bias of the engulfing candlestick correlates with the trend the price is currently on. For instance, a bearish outside bar pattern appearing on a bearish trend is suggesting that the bearish trend continues. Like all other types of candlestick patterns, an outside bar candlestick pattern is a price action indicator (Pattern) used to predict price movement in the forex market.

Remember, candlestick patterns are not foolproof signals, and the Inside and Outside Bars should be used as part of a comprehensive trading strategy. Always test these methods thoroughly and ensure they fit within your overall trading plan. In the screenshot below, the market was in a downtrend as indicated by the orange long-term moving average.

Mastering Outside Bars: Your Guide to Successful Trading

An outside bar signals a potential shift in the market sentiment, with a potential for a trend reversal or a continuation of the current trend. With an outside bar strategy, you are looking for the price movement of one period to break through the entire range of the previous period. This can indicate that momentum is changing and could signal a quick reversal in the market direction. For instance, a bullish outside day bar indicates that the trend is likely to continue during an upswing.

• You can see several outside bars pointed by the arrows, which close near their middle and are basically one-bar trading ranges, which adds to the overall sideways trading.
• For example, a stock may make a small move higher on the first day, then climb even higher on the second day before falling sharply below the first day’s low by the second day’s end.
• The main difference is the outside bar being green for an uptrend/red for a downtrend.
• This is a bar whose high is above the high of the previous bar, while its low is beneath the low of the previous bar.
• Even when price patterns are defined objectively, the context traders consider often makes a difference in how they approach the setup.

This way, you can be sure you’re trading a trend continuation when the bias of the outside bar pattern correlates with the bias of the auto trendline indicator. Traders who use this strategy hope to take advantage of an already established trend. These could be the traders who want to add to their trades or those who try to get in on the trend after missing out on the trend breakout. Like any strategy or indicator, there are times when certain deficiencies make it less desirable to trade with.

Trend reversals in price action

After that, a price gap moves away from the most recent close price, giving investors the appearance the previously recognized trend is still together. Despite this appearance, the gap in price is quickly filled and when it comes time for closing, the price has finished outside the previous day’s open. The bearish outside day pattern is a stronger version of the bearish engulfing. It forms when the second price bar is bearish, regardless of the direction of the first bar.

Take O’Reilly with you and learn anywhere, anytime on your phone and tablet. And we found a TradingView script by AleksanderThor that implements a version of the Outside Bar Failure so that you can play with this idea right away. While it’s not the exact implementation of what we discussed, it is based on the same concept and picks up similar setups. The outcome of this trade was undesirable, but it was not an absolutely bad setup. Other trend filters can work too, and you should experiment with your preferred trend determination method. You can choose any currency pair to get started, and you don’t have to worry about adding other technical indicators.

Reversal Trading Strategy With the Outside Bar Pattern

Outside bars, also known as “engulfing bars” or “mother bars,” are the candlestick pattern used in forex trading. This pattern occurs when the high and low of a single candle fully engulf the high and low of the preceding candle, forming a larger candlestick with a distinct body and wicks. Trading outside bars can be an effective strategy for forex traders looking to identify potential trend reversals and continuation patterns in the market. An outside bar forms when a single candle’s high and low fully engulf the high and low of the preceding candle, creating a larger candle with a distinct body and wicks.

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This will push the price even higher, leading to that strong move we discussed. As mentioned at the beginning of this article, we do not recommend trading outside and inside bars on their outside bar trading own. The conditions that enable the onset of outside bar candlestick patterns are when the market has engaged with a trend yet most recently, a small price range has indicated indecision.

Using a retrace entry will give you a better potential risk reward, but it is also much riskier. In the example below, price moves higher into a swing high that is also a key resistance level before forming a quality outside bar. To increase your trades odds you want to be using other confluences such as the major areas of support and resistance. For a bullish outside bar we need to see it form at a swing low and for price to finish higher and in the top 1/3 of the candle. TrendSpider is a suite of research, analysis, and trading tools (collectively, the “platform) that are designed to assist traders and investors in making their own decisions.

There are a couple of main strategies when it comes to entering the outside bar. See the example below; price has a clear higher high and also a clear lower low than the previous candlestick. For instance, an ‘Inside Hammer’ is when the second bar is both an Inside Bar according to the selected definition and shaped like a ‘Hammer’. We need stops and while they can be mental stops, you have to know where you will exit.