Outside Bar Candlestick Pattern For Price Action Trading
Outside Bar Forex Trading Strategy is a price action candlestick pattern for the Forex market, Futures or any other market you choose to trade.
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.
Where the inside bar indicates lower volatility, an outside bar indicates higher volatility and can often lead to a strong momentum run in price.
The outside bar Forex trading strategy can be used a swing trading strategy when taken around swing points on your Forex price charts.
What Exactly Is An Outside Bar?
Whether you use the term bar or candlestick, the pattern is the exact same: high and low overshadows or engulfs the candlestick before it.
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.
Other terms you may have heard for an outside bar are:
- Bullish Engulfing pattern
- Bearish Engulfing pattern
Not shown in this graphic are the upper and lower shadows however as long as the outside bar completely covers the bar beside it in any form, it will no doubt trade the same.
This chart pattern will be easily visible on a chart and they can appear virtually any place on the chart. This does not mean you will simply trade them as they appear.
You want to add some variables to any trading strategy that utilizes an outside bar.
Trading Outside Bars
Trading the outside bars is straight forward and here are the rules of the outside bar Forex trading system:
- When an outside bar forms, for your entry, you place a buy stop order if bullish outside bar and a sell stop order if bearish outside bar 2-5 pips above the high(if bullish outside bar) and 2-5 pips below the the low (if bearish outside bar). When there is a breakout of high or low, you are triggered into the trade.
- Place stop loss in a similar manner on the other side, 2-5 pips away from the low if its a buy stop order and 2-5 pips above the high if its a sell stop order.
- Take profit has a few options: target previous swing high points (if its a buy order), or previous swing low points if its a sell order. Or 3 times your risk…if you risk 50 pips initially, then you you should set your take profit target at a price level where once hit, will give you a 150 pips profit (3 times your risk).
One of the best trade management technique is to use trailing stops behind the low if its a buy order and above the high if its a sell order. You will get stopped out when a candlestick knocks out the low of the previous candlestick(for a buy order) or you will get stopped out when the high of the previous candlestick is intersected for a sell order.
Note that the chart above is for a buy trade only. A sell trade setup would be the complete opposite of that.
Inside Bars Don’t Have To Be A Trading Strategy
Understanding what the inside bar means on a chart is useful information.
If the previous candlesticks are smaller in structure and you get an outside bar formation, something has changed in the market. An outside bar can actually be part of a price scan that shows markets that have the potential to start a run in price.
Once you see an inside bar, you could use any number of the trading strategies on the website to find trades.
In other words:
- A quiet market suddenly forms an outside bar
- You know that volatility may have returned to the market
- You implement another trading strategy to take advantage of the potential moves to come
Inside bars can simply be information and not an event you trade.
Watch Where Inside Bars Form
As mentioned, on any time frame, in an uptrend or down trend, you can get this chart pattern to form. What you would like to see is this formation taking place at important structures or even an indicator zone – where other traders may see what you are seeing:
- Support or resistance zones
- Extreme highs or lows
- Forming after a pullback to a moving average such as the 20 EMA or 50 period moving average
You can see that increased volatility at a specific area that has the potential to either hold price or even cause a price reversal, is a great potential trade. The key is to monitor for follow-through in price and to ensure that this increased volatility is not due to some news release.
Disadvantages To Trading With Inside Bars
- Stop loss distances can be huge (the larger the time frames used, the larger the stop loss), which means you need to calculate lot sizes based on the risk you are willing to take.
- It may take a while before you can start to see some profits on your trades. This is because the outside bar has already moved a great dealand the next 2-3 candlesticks may be digesting the move that just happened. We all see how after a run in price, it seems that price just stops moving.
- Tempting to trade wherever you find them. You should take trades on outside bar when the chart pattern happens around support or resistance levels, Fibonacci levels, pivots etc.
Why Are Inside Bars A Decent Pattern?
- Easy to Spot and the trading rules are very easy to understand and implement.
- Market has potential to move a very long way when these outside bars form and can bring you hundreds of pips if you ride out the swing or trend by using trailing stops especiallyif you are a swing trader.
- You may even be catching a full trend reversal if you are catching them on daily charts and above.
the core of the strategy is the ADX, the picture sums up all you shud know, also note that some parts of the system have been removed ( as you will see in the pix)rulesNOthing much just avoid buying at resistances and selling at supportstake only the first ADX entry and not subsequent ones, until a reverse signal comes ( will explain more on this later)
The head and shoulder pattern trading system is based on a reversal pattern that is mostly seen in uptrends and in here, you will learn how to trade this pattern. The head and shoulder pattern is easy to spot if you know what you are looking for and it can be found on any timeframe. This pattern can be used as a swing trading and even day trading system. Here is a diagram of what a head and shoulder pattern looks like: WHAT HAPPENS TO CAUSE THE HEAD AND SHOULDER PATTERN TO FORM? Ok, in an uptrend market, eventually the uptrend will slow down (price cannot always keep heading straight for the moon!) and theforces of supply and demand will be in balance. For the numbering below, refer to chart above: Sellers come in at the highs (left shoulder) and what happens is that the downside is probed (which results in a beginning neckline). What happens next is that buyers soon return to the market and push prices to new highs(the head). However, the new high (head) is not sustained as price falls back down due to sellers pushing price down to create a continuing neckline. Buyers enter again pushing the price up to a high, but this high does not exceed the previous high (the head). This high is the right shoulder. Sellers get in and push the price down and this time the neckline is intersected Buyers may get in here and push price up to test the neckline that was intersected which would now act as a resistance. Sellers get in push the price down. HOW TO TRADE THE HEAD AND SHOULDER PATTERN There are two options on how you can trade the head and shoulder pattern: Option 1: Wait for a candlestick to break to break the neckline to the downside. Then place a sell stop order just a few pips (3-5 pips at least) under the low of the candlestick. Place you stop loss 3-5 pips above the high of the right shoulder. Option 2: Once price breaks the neckline, just wait for price to rally back up to touch the neckline which it intersected. This intersected neckline would now act as a resistance line. Once it touches the neckline, place a sell stop order 3-5 pips under the low of the candlestick that touches the neckline. Place you stop loss anywhere from 10-50 pips(depending on which timeframe you are trading in) just above where your sell stop order is placed. Try to use reversal candlestick patterns as your short entry confirmation on this option 2 entry style. WHERE TO PLACE YOU TAKE PROFIT TARGET Here are a couple of options: Take profit option 1 is to 3 times the amount you risked in pips. A second option would be see a previous swing low point where price moved up from and use that level as your take profit target. Did you enjoy this? It would mean the world to me if you shared it:
A pivot point is a specific price level calculated and then used as a technical analysis indicator and trend filter in a chart’s time frame. A charts pivot point level is the average of the high prices, low prices, and closing prices from the last trading day. Price trading above a pivot point signals a potential uptrend and price trading below the pivot point signals a possible downtrend. The pivot point is the foundation for the technical indicator and other price support and price resistance levels that are also projected by using the pivot point calculation. The price levels created by using the pivot points show traders where potential price could see support or resistance levels emerge. Also when the price breaks these key levels it signals to a technical trader the price is currently in a trend in the direction of the break out. There are different ways that are used to calculate the pivot point of price action on a chart. It is usually considered to be the mathematical average of the high price, low price, and closing prices of a market in the previous trading periods: P = (H + L + C) / 3. Many times the average also includes the previous period’s or the current period’s opening price: P = (O + H + L + C) / 4. Some traders like to focus on the closing price, P = (H + L + C + C) / 4, or the current period’s opening price, P = (H + L + O + O) / 4. P= Pivot Point H=High Price L=Low Price C=Closing Price O=Opening Price Below is the monthly pivot point chart of the DJIA for the first 8 months of 2009 near the market bottom, the below chart shows the first and second levels of resistance in green and support with red. The pivot point levels are in yellow. Trading below the pivot point, particularly at the beginning of a trading period sets a bearish market sentiment and often results in more of a price decline, while price is above it a move higher may continue until it is lot again. A pivot point can be both a range bound indicator and show where to look for buying dips and also a trend trading indicator on breakouts.