Outside Bar Strategy: Trade Rejections Like a Pro

Understanding the Outside Bar Pattern

What is an Outside Bar?

An Outside Bar is a powerful two-candle reversal pattern where the second candle completely engulfs the previous candle's range. The outside bar's high is higher than the previous candle's high, and its low is lower than the previous candle's low.

This pattern represents a dramatic shift in market sentiment, showing that one side (bulls or bears) has completely overwhelmed the other, taking control of the price action with decisive force.

Key Characteristics:

The outside bar must completely engulf the previous candle's high and low, creating a clear dominance signal in the market.

Market Psychology

The Outside Bar represents a complete rejection of the previous candle's price action. It shows that after initial movement in one direction, the opposing force gathered enough strength to not only reverse the move but to exceed both extremes.

This pattern often occurs at key market turning points, support/resistance levels, or after significant news events that shift market sentiment dramatically.

Psychology Behind the Pattern:

Shows complete market sentiment reversal where the winning side demonstrates overwhelming dominance over the losing side.

Outside Bar Pattern Types

Bullish Outside Bar

Green candle engulfs red candle

Bearish Outside Bar

Red candle engulfs green candle

Perfect Outside Bar

Complete dominance pattern

Pattern Identification Guide

Essential Identification Rules

1

Higher High

The outside bar's high must be higher than the previous candle's high. No exceptions to this rule.

2

Lower Low

The outside bar's low must be lower than the previous candle's low. This completes the engulfing pattern.

3

Complete Engulfment

The outside bar must completely contain the previous candle's range within its own high-low range.

High-Quality Outside Bar Factors

Location Factors

Key Support/Resistance: Outside bars at major levels have higher success rates

Trend Lines: Patterns at trend line touches are more reliable

Fibonacci Levels: Outside bars at 50%, 61.8% retracements are powerful

Previous Swing Points: Patterns at old highs/lows show strong rejection

Technical Factors

Size Relationship: Outside bar should be significantly larger than inside bar

Volume Confirmation: Higher volume on outside bar validates the pattern

Body Size: Large real body shows decisive price action

Timeframe: Higher timeframes (4H+) provide stronger signals

Market Context Analysis

Trending Markets

In trending markets, outside bars often signal:

Trend continuation after pullback
Major trend reversal at extremes
Breakout from consolidation
False breakout reversal

Ranging Markets

In sideways markets, outside bars indicate:

Bounces from range boundaries
Failed breakout attempts
Range expansion beginning
Support/resistance confirmation

Volatile Markets

During high volatility, outside bars show:

Institutional order flow
News-driven sentiment shifts
Liquidity grab patterns
Market maker activity

Complete Trading Strategies

Entry Strategies

Aggressive Entry

At Close Method

Enter immediately when the outside bar closes, in the direction of the pattern. Best for strong momentum moves.

Break of Extreme

Enter when price breaks above the outside bar high (bullish) or below the low (bearish) with momentum.

Best For:

Strong trending markets and breakouts from key levels with high probability setups.

Conservative Entry

Pullback Entry

Wait for price to pull back to the middle of the outside bar, then enter in the pattern direction.

Confirmation Entry

Wait for next candle to confirm direction before entering. Reduces false signals but may miss some moves.

Best For:

Choppy markets and when you want higher probability with better risk/reward ratios.

Risk Management Rules

Stop Loss Placement

Beyond the Pattern

For bullish outside bars: Stop below the outside bar low. For bearish: Stop above the outside bar high.

Buffer Zone

Add 5-10 pips buffer beyond the extremes to avoid stop hunting by market makers.

ATR-Based Stops

Use 1.5-2x ATR beyond the pattern for volatile pairs to avoid premature stops.

Position Sizing

2% Risk Rule

Never risk more than 2% of account per trade. Calculate position size based on stop distance.

Pattern Quality Sizing

Risk more (1.5-2%) on high-quality setups at key levels, less (0.5-1%) on lower-quality patterns.

Scale-In Approach

Start with smaller size, add to position if pattern plays out as expected.

Profit Target Strategy

Target 1

Quick Profit

1:1 Risk/Reward

Take partial profits at distance equal to your stop loss. Secure quick gains and reduce risk.

Target 2

Swing Profit

2:1 Risk/Reward

Aim for next major support/resistance level or 2x your stop loss distance for swing trades.

Target 3

Trend Profit

3:1+ Risk/Reward

Let profits run to key Fibonacci extensions or major levels in strong trends.

Common Mistakes to Avoid

Trading Pitfalls

Ignoring Context: Trading outside bars without support/resistance or trend context leads to low-probability trades.

Chasing Entries: Entering too late after the pattern has already moved significantly reduces reward potential.

Tight Stops: Placing stops too close to the pattern invites stop hunting by market makers.

Overtrading: Taking every outside bar without quality filters burns capital quickly.

Psychological Errors

Fear of Missing Out: Jumping into trades without confirmation due to FOMO leads to losses.

Holding Losers: Refusing to cut losses when the pattern fails wastes capital.

Revenge Trading: Doubling down after a loss to "make it back" compounds mistakes.

Lack of Discipline: Ignoring trading plan rules destroys consistency.

Outside Bar Strategy Trade Rejections Like a Pro