Inside Outside Bar Direction Highlighter Indicator by alixx220 19 september 2024 – Posted in: Forex Trading

To be a valid outside bar pattern the candlestick needs to have a higher high and a lower low than the previous candlestick. When price has a higher high and a low low it is completely ‘outside’ the previous candle. As the lower volatility comes within the context of seven bars, instead of a single bar like in the case of an inside bar, the NR7 pattern is a stronger sign of decreasing volatility. For the bearish pattern, the market met resistance above the high of the previous bar.

For example; if entering a bearish outside bar you may look to place you stop loss above the closest resistance level. This could give you a tighter stop loss and a bigger potential reward. If the trend continues, the trader increases his profit, and in case of a reversal, he takes the profit and prepares to enter a reversal. The inside bar is a figure of uncertainty, the participants are not sure about the further movement. The breakout of an extremum means determining the direction, so when the breakout is in the direction of movement, the price accelerates. But the breakout is not always true, there are false breakouts, the price consolidates near the inside bar.

Candlestick patterns are great tools to improve your forex trading experience.

Inside and Outside Bars are two Candlestick Structure indicators available in the LuxAlgo Library that traders use to predict market behavior. These formations can help you identify consolidation, volatility, and breakout opportunities. On the example above you can see an inside-outside-inside pattern forming several bars after a two-bar bearish reversal. Although it looks like a trading range which includes a couple of doji bars, the market is clearly forming lower highs and lower lows. Moreover, the highlighted inside-outside-inside pattern ends with a bearish bar with a shaved bottom, an indication the bears are pushing down the market. A short entry below the bearish bar, or even below the whole pattern for extra safety, would be a reasonable order.

Essentially, a key reversal bar is a violent display of strength that hints at a change of market sentiment.
The outside bar pattern can “trick” traders to enter trades when the support or resistance level is broken.
Another cause of outside candlestick formations is increased volatility in the market.
The orange long-term moving average in the image below indicates that the market was in a downward trend.

Key Reversal Bar

For example, if you have a $10,000 account and risk 1% ($100) with a stop loss 10 pips away, and each pip is worth $1, your position size would be 1 mini lot (10,000 units).
Even though all of these combinations are outside days, only those patterns where the first and second bars are in opposite directions are referred to as outside reversal patterns.
I trade reversals 99% of the time with candlestick patterns but a continuation as part of an outside bar trading strategy can be a viable approach.
Trading Futures and Options on Futures involves a substantial risk of loss and is not suitable for all investors.
Unfortunately, achieving a near-perfect win rate with the outside bar pattern is impossible.
A bullish reversal bar pattern goes below the low of the previous bar before closing higher.

This means that the bearish pattern has a large bearish candlestick engulfing a small bullish one. If a bullish Inside Bar pattern forms after a significant downtrend, it could suggest a potential bullish reversal. You could consider entering a long position in the direction of the breakout. Conversely, if a bullish Outside Bar forms during a downtrend, it might indicate a possible bullish reversal. Consider going long in the direction of the Outside Bar’s closing. Inside and Outside Bars are two prevalent candlestick patterns in technical trading.

A bearish exhaustion bar opens with a gap up before moving down to close as a bearish bar. It is not recommended to enter a new position when an outside bar appears. During such periods, the foot breaks, it is extremely difficult to put a short stop. The targeting options in this example are outstanding, so let’s examine them in greater detail here.

Trading Within a Channel in Price Action Terms

Let’s explore the essentials of trading this pattern and other useful information to increase efficiency. Here are the three scenarios where this pattern happens in the markets. These signals not only align outside bar trading with ongoing trends but can also help spot potential reversals. When using a confirmation entry you are waiting for price to break the high or the low and then entering. For example, if you are looking to enter a bearish outside bar you would be waiting for price to move below the low of the outside bar before then entering. You could use a pending sell stop order so you don’t have to actually watch and wait for price to make this move.

Trading Strategy with RSI and Parabolic SAR Combination

I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! This is a bar whose high is above the high of the previous bar, while its low is beneath the low of the previous bar.

Characteristics of the Outside Bar Reversal Strategy

These often signal a pause in the market before the trend continues. In a downtrend, focus on inside bars near resistance or trendlines following bearish candles. The smaller the inside bar compared to the mother bar, the stronger the consolidation and the higher the chances of a breakout. The outside bar candlestick pattern can also be used to trade trend continuations. This happens when the trend bias of the engulfing candlestick correlates with the trend the price is currently on. For instance, a bearish outside bar pattern appearing on a bearish trend is suggesting that the bearish trend continues.

Further Talk on Failed Patterns

Sometimes, the opening price of the bullish candlestick is lower than that of the previous bearish candlestick. In some other cases, the opening prices of the two candlesticks are at the same level. We can see the same pattern in the screenshot below and the candlestick sequence foreshadowed the upcoming downtrend.

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Volume analysis adds another layer of confirmation to these setups. As the market alternates between range contraction and range expansion, the NR7 alerts us to standby for explosive moves. To clarify, bar range refers to the difference between the high and the low of a bar.

Manage your risk by setting stop-loss levels, such as those based on the Average True Range (ATR). While outside bars can serve as standalone signals, their effectiveness is further enhanced when combined price patterns, or fundamental analysis. Seeking confluence between outside bars and other factors can lead to potential probability trade setups and improved trading decisions. Outside bars are difficult to interpret because they very much depend on the context in which they occur. This adds a high chance of further reversals in movement over the next few bars.

Inside and Outside bars offer crucial insights into market behavior. Inside bars typically signal periods of consolidation, while Outside bars point to increased volatility and directional momentum. These patterns tend to perform better on higher timeframes, especially the daily chart. Inside bars are often used as trend continuation setups, while Outside bars highlight strong market movements. Together, these patterns provide a structured approach to trading.

Always test these methods thoroughly and ensure they fit within your overall trading plan. 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.