Swing Trading with the Outside Bar Failure

A reversal can be seen when the pattern occurs after a strong trend move and is usually followed by price moving in the opposite direction. It’s essential to use your judgment and consider other factors such as the overall market sentiment, upcoming economic events, and the risk-reward ratio of the potential trade. This formation is very easy to notice at the chart and that’s why it is so popular. Together, Outside Bar or Pin Bar patterns with SR zones (supports or resistances zones) are useful in trading without any additional confirmation. It is similar to the engulfing patterns, but in contrast to engulfing pattern, an outer day consumes the full price bar of the previous day, including the open, high, low, and close.

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.

• You may also want to consider taking partial profits if the trade moves in your favor.
• The following breakout often happens with a strong momentum candlestick.
• The bearish outside bar pattern follows the same steps of formation as its bullish counterpart, only in reverse.
• The trend continues when the powers between buyers and sellers shift again and push the price in the initial trend direction.
• That is how technical analysts and seasoned traders use it to create trading signals.

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.

Q: How do I set my take-profit target?

However when it shows in the middle of the trend it doesn’t guarantee success. Founded in 2013, Trading Pedia aims at providing its readers accurate and actual financial news coverage. Our website is focused on major segments in financial markets – stocks, currencies and commodities, and interactive in-depth explanation of key economic events and indicators.

The idea is that we are looking to trade the failure of the pattern. So if there are signs that the pattern has likely succeeded and would not fail, the failure setup becomes invalid. No bar high should be lower than the low of the bearish Outside Bar. For simplicity, the rules below use the slope of a 20-period simple moving average (SMA) as a trend filter. In the bullish instance, the bears are sorely disappointed and enter into a state of shock as the market reverses up unexpectedly.

However, in order to safely trade it, you will need to be sure that the market movement will be wide enough to reach your profit target. As weve already mentioned, outside bars are pretty tricky, so logically patterns made out of them cannot be interpreted straightforward as well. Outside bars are difficult to interpret because they very much depend on the context in which they occur. This adds a high chance of further reversals in movement over the next few bars. If the outside bar closes near its middle, it is basically a one-bar trading range. If you are a very aggressive trader you could look to use the surrounding support or resistance levels to set your stop loss.

• False signals and occasional false breakouts can occur, emphasizing the importance of risk management and the need to validate outside bar signals with other analysis tools.
• This happens when the trend bias of the engulfing candlestick correlates with the trend the price is currently on.
• Adding to that strength, the bar closed near its high, while opening close to its low, suggesting bulls were pushing the market up.

In the screenshot below, the downtrend came to an abrupt end when multiple consecutive small inside bar candles were created after the long momentum candlestick. After three inside bars, the momentum then suddenly turned and a strong outside bar reversed the price higher. This is a classic reversal sequence and it nicely shows the turning momentum. The reason this is a trap is that there are times when the price shoots up instantly, only to slump down just as rapidly within a short period of time.

Reversal Patterns and Breakouts

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.

Swing Trading Examples – Outside Bar Failure

The bearish outside bar pattern follows the same steps of formation as its bullish counterpart, only in reverse. This means that the bearish pattern has a large bearish candlestick engulfing a small bullish one. First, these patterns need to form within a downturn (if they don’t, they’re merely a continuation pattern). Second, the majority of bullish reversal patterns need bullish confirmation in order to be revealed as such. As we just mentioned, outside bar candlesticks form when the outside bar overshadows or engulfs the inside bar. Even when price patterns are defined objectively, the context traders consider often makes a difference in how they approach the setup.

A big draw of candlestick patterns as a means of technical analysis is the simplicity. Patterns emerge when they display the open, high, low, and close of a given trading period. The opening to the high is represented by a line, the high to low is represented by a bar, and the low to the close is represented by another line.

Outside Bar Candlestick Pattern For Price Action Trading

Bull flags and bear flags are among the most popular chart patterns and especially trend-following… The blue line confirms the market is in a major uptrend, while the orange line shows there is a minor rerversal uptrend opposing the major one. The last problematic outside bar trading aspect of this strategy is that it’s very tempting to trade them whenever they appear. As always, you should only trade them when the rest of your information aligns with the proposed trade. This is the daily candlestick chart of Entergy Corporation (ETR on NYSE).

The buildup tells us that the price stuck to the level and the market participants that previously caused the price to move away from the level are not as strong anymore. In the context of the scenario below, the sellers were not able to defend the resistance level anymore and the buying power held the price up. The following breakout often happens with a strong momentum candlestick. Not always will it have the characteristics of an outside bar, but it must be significantly larger than the candlesticks during the breakout buildup. Another way to confirm the trade entry is to look for additional candlestick patterns or technical indicators to support the outside bar setup. This formation signals an entry in the direction of the breakout of the second inside candle.

FED, ECB, BoJ – what will the forex market look like after the interest decisions?

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.

It’s not an outside bar candlestick pattern if the engulfing candlestick has not been closed. One of the most commonly used among them is the outside bar candlestick pattern. In this article you’ll learn everything you need to know about the powerful outside bar candlestick pattern and how to use it in your forex trading. The first strategy we’ll look at when discussing trading outside bar patterns is the reversal.