Outside Bar Strategy Trade Rejections Like a Pro
Discover how Outside Bar formations reveal shifts in buyer and seller control at critical price levels. This guide covers pattern structure, market psychology, confirmation techniques, entry timing, and risk management strategies for high-probability forex trades.
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
Higher High
The outside bar's high must be higher than the previous candle's high. No exceptions to this rule.
Lower Low
The outside bar's low must be lower than the previous candle's low. This completes the engulfing pattern.
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
1:1 Risk/Reward
Take partial profits at distance equal to your stop loss. Secure quick gains and reduce risk.
2:1 Risk/Reward
Aim for next major support/resistance level or 2x your stop loss distance for swing trades.
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.