The outside bar pattern, also known as an engulfing pattern in candlestick terminology, is one of the most powerful reversal signals in price action trading. When a candle completely engulfs the previous candle's range, it shows a dramatic shift in market sentiment. This guide will teach you how to identify, trade, and profit from outside bar patterns.
What is an Outside Bar?
An outside bar is a two-bar pattern where the second bar completely engulfs the first bar's range. The outside bar's high is higher than the previous bar's high, and its low is lower than the previous bar's low. This pattern represents a significant shift in control from one side of the market to the other.
Key Definition: The outside bar must have both a higher high AND a lower low than the previous bar. It completely surrounds or engulfs the prior bar, showing that buyers and sellers both pushed hard, but one side won decisively.
Types of Outside Bars
Bullish Outside Bar (Bullish Engulfing)
A bullish outside bar forms after a downtrend and signals potential reversal upward:
- First bar is bearish (red), continuing the downtrend
- Second bar opens lower but closes higher than the first bar's high
- The outside bar engulfs the prior bar and closes near its high
- Shows buyers overwhelmed sellers and took control
Bullish Outside Bar Example
Stock ABC in a downtrend at $45:
- First bar: High $47, Low $44, Close $45 (bearish)
- Outside bar: High $49, Low $43, Close $48 (bullish)
- The outside bar made a lower low ($43) and higher high ($49)
- Closed near the high, showing bullish control
Bearish Outside Bar (Bearish Engulfing)
A bearish outside bar forms after an uptrend and signals potential reversal downward:
- First bar is bullish (green), continuing the uptrend
- Second bar opens higher but closes lower than the first bar's low
- The outside bar engulfs the prior bar and closes near its low
- Shows sellers overwhelmed buyers and took control
Bearish Outside Bar Example
Stock XYZ in an uptrend at $100:
- First bar: High $102, Low $98, Close $101 (bullish)
- Outside bar: High $104, Low $95, Close $96 (bearish)
- The outside bar made a higher high ($104) and lower low ($95)
- Closed near the low, showing bearish control
Trading Strategies
Strategy 1: Trade the Close
Enter in the direction of the outside bar close.
Bullish Outside Bar Trade
- Outside bar closes bullish at $48
- Entry: Buy at $48.20 (just above close)
- Stop loss: Below outside bar low at $42.80
- Target 1: $53 (prior resistance)
- Target 2: $58 (measured move)
Strategy 2: 50% Retracement Entry
Wait for price to retrace into the outside bar before entering:
- Calculate the 50% level of the outside bar range
- Place limit order at this level
- Better entry price and tighter stop loss
- Risk: Price may not retrace and you miss the move
Strategy 3: Breakout Entry
Wait for price to break the outside bar extreme in the expected direction:
- For bullish: Enter when price breaks above outside bar high
- For bearish: Enter when price breaks below outside bar low
- More confirmation but worse entry price
Where Outside Bars Work Best
Outside bars are most powerful in these contexts:
- At support/resistance: Pattern at key level adds confluence
- After extended trends: More likely to signal true reversal
- With volume confirmation: High volume increases reliability
- On daily or higher timeframes: More significant than intraday
- At round numbers: Psychological levels add importance
The Psychology Behind Outside Bars
Understanding the psychology makes trading these patterns more effective:
- The first bar represents the current trend participants
- The outside bar opens with trend continuation (gap or early move)
- Counter-trend traders step in aggressively
- They push through the prior bar's range in both directions
- The close reveals who won the battle
Volume Considerations
Volume is crucial for validating outside bars:
- High volume outside bar: Very strong signal, significant participation
- Average volume: Still valid but watch for follow-through
- Low volume: May be unreliable, could be noise
Ideally, the outside bar should have notably higher volume than recent bars, showing conviction behind the move.
Common Mistakes to Avoid
- Trading without trend context: Reversal patterns need a trend to reverse
- Ignoring the close: Where the bar closes determines bias
- No stop loss: Place stops beyond the outside bar extreme
- Wrong timeframe: Intraday outside bars are less reliable
- Ignoring volume: Low volume outside bars often fail
Outside Bar vs Inside Bar
These patterns are opposites and provide different information:
- Outside bar: Expansion, volatility increase, immediate signal
- Inside bar: Contraction, volatility decrease, pending breakout
- Outside bar: Shows who is winning now
- Inside bar: Shows indecision, waiting for direction
Timeframe Analysis
Outside bars have different reliability across timeframes:
- Weekly charts: Most powerful, often marks major turning points
- Daily charts: Excellent for swing trading
- 4-hour charts: Good for active traders
- 1-hour and below: Many false signals, need filtering
Combining with Other Analysis
Outside bars work best when combined with:
- Support and resistance: Patterns at key levels are more reliable
- Moving averages: Outside bar at 50 or 200 MA adds significance
- RSI divergence: Confirms momentum shift
- Fibonacci levels: Pattern at key retracement level
- Trend lines: Outside bar at trend line break is powerful
Analyze Your Pattern Trading Results
Pro Trader Dashboard tracks all your trades and shows detailed analytics. See how your outside bar trades perform compared to other setups and improve your strategy over time.
Summary
The outside bar pattern is a powerful reversal signal that shows a dramatic shift in market control. When you see a candle completely engulf the previous bar and close strongly in the opposite direction, pay attention. These patterns work best at key levels, with volume confirmation, and on daily or higher timeframes. Proper stop loss placement and risk management are essential for successfully trading outside bars.
Continue your education with our guides on the pin bar strategy and fakey pattern.