The Outside Bar:
How to Spot and Trade It

Let’s explore this useful price action-based trigger.

Let’s talk about the outside bar…

How do we identify the outside bar pattern and implement it in our own trading?

Whilst we call it an outside bar, pretty much everyone uses it as a candlestick pattern, but if you’re a diehard fan of bar charts, you can apply it on that chart as well.

But how to spot an outside bar?

Easy…

For a valid pattern of this kind, the current candlestick must have a higher high and a lower low than the previous one.

Price has explored both extremes within one session or timeframe.

Here are some on the chart:

These are similar to an engulfing bar, but engulfing requires that the BODY of a second candle cover the previous one entirely.

Outside bars don’t care about bodies, only highs and lows. Still, an outside bar can sometimes be an engulfing bar as well.

OK, so what? What does an outside bar tell me?

Well, it tells a lot, but you need context.

Trend Reversal

To begin with, outside bars can be treated as reversal patterns in trending markets.

For example, if the big-size candle comes after the small-size one following a strong uptrend, then you might hypothesise that the bears are coming.

You can go back to my chart above to see how this pattern signals the reversal of an uptrend.

Similarly, a bullish outside bar can form after a strong downtrend, signalling the formation of a bullish move.

Trend Continuation

We can also treat outside bars as trend continuation patterns.

Usually, they show up during pullback phases, with the big-sized candlestick signalling the continuation of the trend.

In this case, there is a nuance you should know about: the body of the small-sized candle is always closer to the extreme of the big-sized candle, depending on the general trend.

E.g., during a downtrend, the pattern forms during a short-term pullback, with the first candle being closer to the high of the second candle.

Take a look at this EUR/USD chart: during a bearish move, a strong pullback formed, potentially suggesting a trend reversal supporting EUR.

But no, the outside bar pattern showed up to signal that bears are in control.

“OK, now I know everything about the outside bar. Any idea how to use it?”

Yep.

If you spot this pattern during strong trends, you may consider opening positions against the trend after the big-sized candle closes.

Here, size matters…

The longer a trend has been going on, the higher the chances for a reversal.
If the pattern shows up during pullbacks, be ready to open positions when the price breaks outside the pullback to continue the general trend.

Simple but effective.

There are several reasons why I like them:

  • You can easily spot them
  • They make sense from a price action perspective
  • You can use them as a final trigger as part of a bigger strategy

For me, they work best on the higher timeframes like the daily, but you can explore on other timeframes as well. (I’d just avoid the really low ones.)