The Outside Bar Candlestick Pattern is a technical analysis tool used in Foreign Exchange (Forex) Market to identify potential reversal or continuation of a trend. It is believed to have been developed by Japanese rice trading tycoons (ryōgaeshō) in the 18th century but it has been established during the 16th century in Dōjima and has since been adopted by traders in various financial markets.
The Outside Bar Candlestick Pattern is formed when the price action of a given period, usually a day in the forex market, creates a candlestick that is completely outside of the range of the previous candlestick. This means that the high and low of the current candlestick are higher or lower than the high and low of the previous candlestick, respectively.
What is the Outside Bar Candlestick Pattern?
The strategy behind the Outside Bar Candlestick Pattern is to use it as a signal to enter a trade in the direction of the trend, either long or short. It is believed that when the price action creates an Outside Bar, it is a strong indication that the current trend is about to reverse or continue.
Characteristics of the Candles as follows:
The candlestick pattern that forms the Outside Bar pattern is composed of a body and two wicks. The body represents the range between the opening and closing prices of the given period, while the wicks represent the high and low prices of the period. In an Outside Bar pattern, the body of the current candlestick is completely outside of the range of the previous candlestick, as mentioned earlier.
When analyzing currency pairs in the forex market, traders can use the Outside Bar Candlestick Pattern to identify potential trend reversals or continuations. For example, on the USD/JPY pair, a bullish Outside Bar pattern would be formed when the current candlestick has a higher high and higher low than the previous candlestick, signaling a potential end to the downtrend or continuation of the uptrend. On the other hand, a bearish Outside Bar pattern would be created when the current candlestick has a lower high and lower low than the previous candlestick, indicating a potential end to the uptrend or continuation of the downtrend.
Here are three points to support the strategy of using the Outside Bar Candlestick Pattern:
- It is a clear and easy-to-identify technical analysis tool that can be used by traders of all levels.
- It can be used to confirm other technical indicators or signals, such as a break of a trendline or a change in momentum.
- It can provide traders with a clear and objective way to enter or exit a trade based on the price action of the market.
Outside Bar Strategy
Bullish Outside Bar Candlestick Pattern
- The current candlestick has a higher high and a higher low than the previous candlestick, indicating a potential reversal or continuation of the uptrend.
- The current candlestick closes near its high, indicating a strong demand for the asset.
- The previous candlestick was a bearish candlestick, such as a shooting star or a bearish engulfing pattern, indicating a potential reversal of the downtrend.
Bearish Outside Bar Candlestick Pattern
- The current candlestick shows a lower high and lower low compared to the previous one, potentially signaling the end of an uptrend or continuation of a downtrend.
- The current candlestick has a closing price close to its low, indicating increased selling of the asset.
- The previous candlestick was a bullish pattern, like a bullish engulfing pattern or a hammer, which could indicate a potential reversal of the downtrend.
Outside Bar Candlestick Pattern Pros & Cons
Pros
- The Outside Bar Candlestick Pattern is a clear and objective way to detect potential trend reversals or continuations.
- It can be used in conjunction with other technical indicators or signals to confirm trades.
- This pattern offers traders a clear point of entry or exit based on the price action of the market.
Cons
- It may not be as reliable in markets with low liquidity or with the market with low volume of trades
- It requires traders to have a good understanding of candlestick patterns and technical analysis in general.
Conclusion
The Outside Bar Candlestick Pattern is a useful technical analysis tool for identifying potential trend reversals or continuations. It is created when the current candlestick’s price range is completely outside of the previous candlestick’s range. This pattern can be used as a signal to enter a trade in the direction of the trend, either long or short. However, it may also produce false signals and may not be as reliable in certain market conditions, the Outside Bar Candlestick Pattern can provide traders with a clear and objective way to enter or exit a trade based on the price action of the market.
Self-confessed Forex Geek spending my days researching and testing everything forex related. 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! Read more about me.
