Inside and outside bars are quite popular among price action traders – for good reasons. Although trading single candlestick patterns is usually not a robust trading approach, if such candlestick patterns are traded within the right chart context, it is possible to create more robust signals.
An outside bar pattern consists of two candlesticks. The first one is typically much smaller and the second completely engulfs the first candlestick; hence the name outside bar. The outside bar can have various meanings, depending on the chart context. In the following article, we are going to discover three different trading strategies and how the outside bar can act as an important trigger for each one.
Strategy 1: Reversal
At the end of an established trend, one can often recognize the same pattern:
After a long momentum candlestick, the momentum suddenly drops off and signals a lack of trend support. 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.
We can see the same pattern in the screenshot below and the candlestick sequence foreshadowed the upcoming downtrend. After multiple consecutive bullish candlesticks, the momentum slowed down and two very small inside bars signaled the end of the bullish power. Then, a strong bearish outside bar started the new downtrend.
To increase the chances of finding high probability reversals, one would only look for such candlestick sequences during over-extended trends that have been going on for a significant amount of time. The longer a trend has been going on, especially in the Forex market, the higher the chances that such a candlestick pattern is actually the start of an opposite trend.
Strategy 2: Trend-Continuation
When outside bar sequences exist during pullback phases, they can act as trend-continuation signals.
In the screenshot below, the market was in a downtrend as indicated by the orange long-term moving average. Consolidations are normal events during trending phases when the market moves sideways temporarily. The trend continues when the powers between buyers and sellers shift again and push the price in the initial trend direction. Such continuation-pushes often occur with an outside bar that signals momentum in the trend direction. It can be an important signal that indicates more momentum to come.
The screenshot below shows a similar situation. The price was in a downtrend as indicated by the position of the price below the long-term moving average. A trader would then wait for a bullish pullback and trade once an outside bar in the initial trend direction occurs.
Of course, trends usually don’t last forever and, therefore, trading only the first or second pullback can mitigate the risks of getting into a trend too late.
Strategy 3: Breakout Buildup
The breakout buildup is one of my favorite price action setups and an inside-bar-outside bar combination can often be found at its origin.
In the screenshot below, the price was confined within a well-defined sideways range. The price then kept trading into the red resistance level. Although we will never know if a breakout will happen before the price really breaks out, the buildup before the breakout can often foreshadow an imminent breakout.
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. This is a clear sign of strength. The buildup candlesticks often have the dimensions of inside bars. 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.
In the screenshot below, the price first showed a breakout buildup with inside candlesticks just underneath the resistance level and the breakout happened with a strong outside bar.
Then, during the trend, another bullish outside bar during the first pullback provided another potential trading opportunity.
As mentioned at the beginning of this article, we do not recommend trading outside and inside bars on their own. But once the trader can put candlestick patterns in the right context and build a trading strategy that makes use of the candlestick patterns in a more sophisticated context, such trading signals may help the trader to time high probability trading opportunities.
FAQs
What Is a 3 Bar Play? It's a popular but simple strategy of recognition of reversal based on 3 bars that signify a bullish or bearish trend after a sustaining trend in the opposite direction.
What is the 3 bar strategy? ›
What Is a 3 Bar Play? It's a popular but simple strategy of recognition of reversal based on 3 bars that signify a bullish or bearish trend after a sustaining trend in the opposite direction.
What is OutSide bar strategy? ›
Definition. The OutSide Bar strategy compares the bar's high and low values with those of the previous bar. If the current high is higher than the previous one and the current low is lower than the previous one, the strategy will enter a position.
What is the 3 bar method? ›
The 3 bar play is a common chart pattern characterized by three (or four) consecutive candlesticks that may appear in a downtrend, uptrend, or neutral market. Technically, although the pattern is known as 3 bar play pattern, it consists of four candles rather than three in some formations.
What is the 3 OutSide candle pattern? ›
The three-outside-down candlestick indicates the following: A three-outside-down candlestick is formed when the market is on an upswing. It indicates a trend reversal for financial security. The increase shown by the first candle is a continuation of the upward trend due to the bullish behavior of the investors.
What is the bullish 3 method? ›
The bullish 3-Method formation is a signal to buy or hold long positions, as the pattern suggests that the bullish trend will continue. The bearish 3-Method formation, on the other hand, is a signal to sell or hold short positions, as the pattern indicates the continuation of the bearish trend.
What is a 3 bar in stocks? ›
The 3 Bar Reversal Indicator is a popular technical analysis tool used by traders to identify potential trend reversals in the Indian stock market and other financial markets worldwide. It is based on a simple yet effective pattern recognition system.
How to trade outside bar candlestick? ›
For Outside Bars, look to trade in the direction of the bar's closing. Set Stop Losses and Take Profits: Use the previous bar's high and low as a benchmark for setting stop losses. Determine your take profit level based on your risk-reward ratio.
What is a bullish outside bar pattern? ›
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.
What is a bullish outside bar? ›
A bullish outside reversal, also called a bullish engulfing, happens when the second candle is a move higher. For instance, a stock may make a small move lower on the first day, then open even lower than the prior day, but rally sharply higher by the end of the second day.
The 3 bar reversal pattern is a technical indicator that is used to identify trend reversal signals. The pattern involves 3 consecutive candlesticks, whose movement indicates whether a reversal in the trend is bound to happen or not.
What is the 3 candle reversal strategy? ›
Key Takeaways. The three inside up pattern is a bullish reversal pattern composed of a large down candle, a smaller up candle contained within the prior candle, and then another up candle that closes above the close of the second candle.
What is the three bar reversal indicator? ›
The pattern consists of three consecutive bars: the first bar represents the existing trend, the second bar shows a strong reversal against that trend, and the third bar confirms the reversal by closing beyond the high or low of the second bar.
What is the most famous candle pattern? ›
The most powerful candlestick pattern is often regarded as the Hammer (bullish) or the Shooting Star (bearish) pattern, as they typically indicate a strong reversal signal when they appear after a downtrend (Hammer) or an uptrend (Shooting Star).
What is the most accurate candle pattern? ›
Bullish & Bearish Engulfing
Engulfing patterns are widely considered to be one of the more accurate candlestick patterns.
What is the rarest candlestick pattern? ›
The rarest candlestick pattern is often considered the “Abandoned Baby.” This pattern is a strong reversal signal, consisting of a gap followed by a Doji candle, and another gap in the opposite direction.
What does outside bar mean in stocks? ›
Outside Bars. If the high of the current bar is above the high of the previous bar and the low is below the low of the previous bar, then the current bar is an outside bar.
Is outside bar bullish or bearish? ›
A bullish outside bar candlestick goes lower than the previous candle lows and then closes higher than the previous candle highs. A bearish outside bar candlestick goes higher than the previous candle highs and then closes lower than the previous candle lows.
What is outside bar and inside bar? ›
The difference between an inside bar candle and an outside bar candle lies in their price range. An inside bar has a price range entirely within the previous candle's range, while an outside bar has a price range that extends beyond the high and low of the previous candle, indicating greater volatility.
What is the outside day strategy? ›
Key Takeaways. An outside day is a daily price action that has a higher high and a lower low than the prior price bar. An outside day also has an open and close that both fall outside the prior open and close. When the price bars move in opposite directions, it's called an outside reversal.
