Chapter 7: Outside Bars Trading Price Action Trends: Technical Analysis of Price Charts Bar by Bar for the Serious Trader Book

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• Outside bars are difficult to interpret because they very much depend on the context in which they occur.
• Another cause of outside candlestick formations is increased volatility in the market.
• Outside bars can act as an entry bar at the bottom or the top of corrections.
• Moreover, the highlighted inside-outside-inside pattern ends with a bearish bar with a shaved bottom, an indication the bears are pushing down the market.

For example; if entering a bearish outside bar you may look to place you stop loss above the closest resistance level. This could give you a tighter stop loss and a bigger potential reward. The outside bar pattern can “trick” traders to enter trades when the support or resistance level is broken. Once the trader sees the reversal pattern take shape, they exit their trades causing price to move rapidly in the other direction. There are two major ways to trade the outside bar candlestick pattern.

Outside bars as trend bars

This happens after a long momentum candlestick has suddenly lost its momentum. In this scenario, the downturn hits a sudden end when multiple inside bar candles appear following the momentum candle. The emergence of this pattern is one of the most recognizable and well-known reversal patterns and it clearly shows a change in momentum. The outside bar Forex trading strategy can be a great way to capitalize on market moves. With its simple rules and potential for large profits, it is an accessible strategy that many traders can benefit from.

We won’t always get inside bars to help us enter a trade so we need another method and that is simply a break of the highs over the next few bars. Of course, trends usually don’t last forever and, therefore, trading only the first or second pullback can mitigate the risks of getting into a trend too late. When outside bar sequences exist during pullback phases, they can act as trend-continuation signals. We recommend that you seek independent financial advice and ensure you fully understand the risks involved before trading.

Let’s backtest some outside day trading strategies with specific settings and trading rules. Check out TrendSpider’s Strategy Tester to experiment with hundreds of possible trading strategies without taking any risk. Like always, ensure you map out a trading plan, risk protocols, and follow it on every single trade. We would place a buy stop order just above the high (red circle) or if watching real time, hit the buy button once price breaks the high of the candlestick.

• A Bearish Outside Bar is a significant candlestick pattern in forex trading that offers valuable insights into potential trend reversals and shifts in market sentiment.
• The first thing to keep in mind is using other factors in your favor when looking for a potential outside bar trade.
• In the case of the outside bar candlesticks, the first issue is that stop-loss distances can be very big.
• This happens after a long momentum candlestick has suddenly lost its momentum.

This is when one can say that the bullish outside bar candlestick pattern has formed. A bullish outside bar pattern forms when a little bearish candle precedes a large bullish one. Sometimes, the opening price of the bullish candlestick is lower than that of the previous bearish candlestick. In some other cases, the opening prices of the two candlesticks are at the same level. One way to confirm the trade entry points is to wait for the outside bar setup to close.

Short Swing Trade

When these figures are looked at all together, the resulting shape resembles a candlestick. As long as you have a clear trading plan and are willing to stick to it, the outside bar trading strategy can offer traders an effective way to capitalize on market moves. It can be both a bullish reversal pattern, a bearish reversal, or even be used during a continuation move from some type of consolidation. It’s actually similar to the  inside bar Forex system except for the larger bar or candlestick being on the right side of the most recent price action. Think of the “mother bar” of an inside bar pattern being on the opposite side of price. On the example above you can see an inside-outside-inside pattern forming several bars after a two-bar bearish reversal.

Disadvantages To Trading With Inside Bars

The increased size of the bar means that bulls and bears are willing to be more aggressive, but if the close is near the middle, it is essentially a one-bar-long trading range. In fact, by definition, since an outside bar totally overlaps the prior bar, every outside bar is a part of a trading range, which is two or more bars that largely overlap. The outside bar can be either bullish or bearish and how you trade them will depend on your trading strategy. If you trend trade, you will probably only trade the outside bar pattern that conforms to your directional bias in the market.

Watch Where Inside Bars Form

After multiple consecutive bullish candlesticks, the momentum slowed down and two very small inside bars signaled the end of the bullish power. The bullish outside bar pattern appearing on a major uptrend suggest a trend continuation on the uptrend. Also, the pattern appearing right after the breakout from the minor downtrend further suggest a trend continuation. What matters most, however, is that the closing price of the bullish candlestick is way higher than the closing price of the previous bearish candlestick.

For a bearish outside bar we need to see it formed up at a swing high and for price to close in the bottom 1/3 of the candle. If the second price bar declines, it indicates that sellers were in charge and that the price may drop further. Likewise, if the second price bar was up, indicating that purchasers were in charge, the price might go up. Learn how to trade with precision accuracy, find ideal entry points,
and create a lifetime of trading income using patterns and price action. Market participants that day trade may, once price broke lows and then reversed to green, take the entry as a front run of the complete formation of an OB when the candlestick closes.

Any statements about profits or income, expressed or implied, do not represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. You accept full responsibilities for your actions, trades, profit or loss, and agree to hold The Forex Geek and any authorized distributors of this information harmless in any and all ways. Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more.

You could use a pending sell stop order so you don’t have to actually watch and wait for price to make this move. Keep in mind; this is a reversal signal so it is very important where you play this candlestick trade from. Just as the example shows below, with a bearish outside bar you need to be finding them up at swing highs. Whilst the outside bar is not as common as some of the other candlestick patterns like the pin bar and inside bar, it is very easy to identify.

What is an outside day (bar) in trading?

A simple approach is either the low of the previous candle or at the midpoint of that candle. Unlike the inside bar that is completely inside the previous bar, the outside bar candlestick takes out both the high and the low of the previous bar. Every Thursday we send out a brand new trading newsletter with trading tips, the chart of the week, and insights into the world of online trading. We will cover the confirmation needed later on under the reversal and Trend Continuation strategies.

When the outside bar candlestick forms, it indicates that the prevailing mindset and beliefs of investors have changed over the course of the day. You need a clear idea of when you will exit the trade, either at your profit target or if your stop loss order is triggered. This helps to avoid emotional decision-making, which can lead to impulsive and potentially costly trades. Setting a stop loss order ensures that you are not exposed to excessive losses if the trade moves against you. When setting a stop-loss order, it’s important to consider the risk-reward ratio of the trade and the overall market volatility. A stop-loss order is an order to close a trade at a predetermined price level to limit potential losses.