The Outside Bar + Play

Adding More Filters to the Outside Bar

Is there more to the Outside Bar?

Recently I found myself thinking more about the outside bar.

“Thinking about the outside bar?”

Yeah yeah, stop sniggering at the back…

Anyway, I started to ponder:

“Is the outside bar one of the best reversal indicators and should I be using it more?”

Let me explain.

So an outside bar (on a daily chart) for the 5 people reading this that don’t know, is when the high of the day exceeds the high of yesterday, and the low of today exceeds the low of yesterday.

A real-life outside bar from SPX!

 
The idea is this:

If price has taken out the high and low of the previous day that’s an indication that there’s a supply/demand imbalance and depending on where the bar closes could be a signal to join the party.

When you think about it, we could be looking at a number of scenarios

  • A stop hunt – price took out the low, pinged stops and then ripped higher
  • Intraday sentiment shift – Something key changed and it’s played out intraday
  • An exhaustion move – If accompanied by high volume and at the end of a trend


But there’s a big caveat – where the bar closes is key.

Because if your thesis is:

  1. Price has taken out the low and triggered stops
  2. Selling has dried up and buyers have stepped in
  3. Yesterday’s high has been taken out
  4. Momentum will continue over the next X days

Then you want the close to be above the prior high for a bull bar, or below the prior low for a bear bar.

If you want that momentum to continue then you don’t want anything counteracting that imbalance, you want that market pressing hard and closing at the best possible price.

Outside bars on the DAX – all decent signals


Enter the Outside Bar +

The Outside Bar + is a ‘normal’ outside bar but with additional filters:

  1. The close must be near the h/l of the day
  2. The close must be above/below the prior h/l
  3. The bar must be in the opposite direction to the prior bar*


*Eg: if yesterday was a down day, today needs to be an up day and vice versa.

Why?

Because we get the added boost of a sentiment shift + the stops pinged + a possible bunch of trapped traders.

Cable:

 
It might be a simple pattern, often overlooked even, but with a few adjustments, I think it can be quite powerful.

Today, think about how you could integrate the outside bar + into your strategy.

If you are a day trader could you wait for an outside bar + and then on the next day play only from the long side, banking on a daily continuation that you could capitalise on intraday?

If you are a swing trader, could you bolt the outside bar + into your existing strategy? Add it as confirmation to get involved or add more size?

Price Based Patterns

If you like simple clutter-free price-based patterns like this, check out a video Linda Raschke did a while ago called Short Term Scalping Patterns With Candlesticks.

Some real gems in there…