What is an outside bar?
Another very common and successful candlestick pattern is an outside bar, or engulfing bar as they are sometimes called, because they engulf the previous candle. Knowing how to trade outside bars will put plenty of pips in your trading account. Outside bar candlestick patterns are far more reliable trading signals than inside bar patterns are. If you know how to trade inside bars then trading outside bars is very much the same.
The picture on the right shows a bearish outside bar candlestick pattern. Here you can see that the bearish red candle is completely outside the bullish green candle. The red candle completely engulfs it, hence the term engulfing bar.
Why are outside bars more reliable than inside bars?
Outside bars represent a total shift in sentiment (in this case from bullish to bearish). The bearish price action in the red candle is far greater than the bullish green candle, so we have had a total shift in sentiment from bullish to bearish. The red candle is twice the size of the green candle which indicates strong selling pressure.
If you compare the outside bar price action to the price action of an inside bar, where the candle is a lot smaller than the preceding mother candle, you can understand that a bigger candle means a bigger shift in sentiment, which equals a more reliable trade, and that is why outside bars are more reliable candlestick patterns than inside bars are.
How to trade outside bars.
The general rules on how to trade outside bars would be to enter the trade at the breakout of the red outside bar. Some traders prefer to see a retrace of the outside bar before taking the trade. The only problem with taking the trade on a retrace of the outside bar, is you may not get a breakout, you may get another inside bar instead, and then the trade becomes a lot less reliable.
My advice would be similar to the advice i gave on how to trade inside bars, which is wait for the breakout, and then look for the retrace, before entering.
For more information on how to trade outside bars please consider my Forex training course.
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