An outside bar is a reversal and continuation trading method in which the current candle, high and low, completely engulfs the preceding candle high and low. You can use this method to help you identify bullish and bearish reversal/continuation patterns.
How can you identify the outside bar pattern?
The bullish and bearish engulfing candlesticks are used in the outside bar candlestick pattern. In addition, a small candlestick is usually placed next to a large one in this pattern.
The outside bar candlestick pattern is easy to recognize: in opposing directions, a little candlestick precedes a large candlestick. However, a trader might fall into a trap if they attempt to trade the pattern before it completely develops.
The reason this is a trap is that there are occasions when the price skyrockets only to plummet just as quickly in a short amount of time. In the end, we have a candlestick with a very long wick.
And this isn’t a candlestick for an outside bar. If the engulfing candlestick hasn’t been closed, it’s not an outside bar candlestick pattern.
How to apply the outside bar pattern strategy?
You can apply the outside bar for trend continuation and reversal strategy.
When it comes to trading outside bar patterns, reversal is the first approach we’ll look at. This occurs when a long momentum candlestick loses its momentum unexpectedly.
When many inside bar candles develop after the momentum candle, the decline comes to an abrupt close. This pattern’s emergence is one of the most easily recognized and well-known reversal patterns, indicating a change in momentum.
The break of the low/high of the outside bar, which would activate your trade against the previous trend, is the first proof of a trend reversal.
Only when a new price pivot emerges in the trend’s direction can we confirm a second trend reversal.
The second strategy is to seek signs of trend continuation. Traders that employ this method are hoping to profit from an already established trend. Traders who want to add to existing positions or those who want to get in on the trend after missing the trend breakout may fall into this category.
When outside bars are present during pullback periods, these signs appear.
The break of the low/high of the outside bar in the direction of the preceding trend, which would also be the entry point of your trade. This confirms a trend continuation outside the candle.
Keep in mind that outside bar candlestick patterns formed after a pullback in an uptrend or a rally in a downtrend have a better chance of success.
The signal is stronger if the bullish outside bar candlestick pattern closes in the upper half of its range. A bearish outside bar candlestick pattern that closes in the bottom quarter of its range, on the other hand, is a stronger indicator.
Bottom line
You may use the outer bar candlestick pattern as a price action tool to detect future trend continuations or reversals. It’s based on the engulfing candlestick pattern, which can be bullish or bearish.
