When it comes to trading Forex, understanding the outside bar trading strategy can be a great first step toward profits.
The outside bar forex trading strategy is used by traders to identify possible reversals in the markets using just price action. It is similar in concept to the inside bar strategy but the setup is reversed.
WHAT IS AN OUTSIDE BAR PATTERN?
With an outside bar strategy, you are looking for the price movement of one period to break through the entire range of the previous period. This will take the shape of a momentum candlestick. This can indicate that momentum is changing and could signal a quick reversal in the market direction.
This creates a bar that “engulfs” the previous bar. An outside bar signals a potential shift in the market sentiment, with a potential for a trend reversal or a continuation of the current trend.
If a trader sees a high probability outside bar pattern occurring at a support/resistance zone, it could be an indication of increased opportunity on an entry or trade setup.
Timeframes And Currency Pairs
Trading the forex markets on a 4hr and daily timeframe is a fantastic way to make long-term gains – with none of the usual hassle that comes with short-term trading.
You can choose any currency pair to get started, and you don’t have to worry about adding other technical indicators.
Identifying Potential Outside Bar Trading Signals
The first thing to look for is an outside bar set up on the forex charts. This means you are looking for a candlestick pattern that meets the criteria of an outside bar as discussed.
Once you have identified a potential outside bar setup, the next step is to look for key levels of support and resistance that could trigger the setup. Support and resistance levels are areas on the chart where the price has bounced off in the past or where the price has struggled to break through.
These levels can be identified using technical analysis tools such as trend lines, Fibonacci retracements, or moving averages.
Not all potential outside bar setups will be worth trading. It’s essential to use your judgment and consider other factors such as the overall market sentiment, upcoming economic events, and the risk-reward ratio of the potential trade.
Identifying potential trades using the outside bar forex trading strategy requires a combination of technical analysis and judgment. By looking for outside bar setups, identifying key levels of support and resistance, and maybe considering other technical indicators, you can increase your chances of identifying profitable trades.
Reversal Patterns and Breakouts
When you identify an outside bar candlestick, it’s important to consider whether the pattern is indicating a reversal or a breakout. A reversal can be seen when the pattern occurs after a strong trend move and is usually followed by price moving in the opposite direction.
Breakouts occur when the inside bar breakouts past previous resistance or support levels. If the price action is strong enough, this can be an indication of a breakout move.
Setting Entry and Exit Points for Maximum Profits
Once you have identified a potential outside bar setup and assessed the risk-reward ratio, the next step is to confirm the trade entry. Confirming the trade entry involves waiting for additional signals to confirm that the outside bar setup is valid.
One way to confirm the trade entry points is to wait for the outside bar setup to close. This means waiting for the candlestick pattern to complete and for the current candle to close. If the current candlestick has closed outside of the previous candle’s range, this is a confirmation that the outside bar setup is valid.
Another way to confirm the trade entry is to look for additional candlestick patterns or technical indicators to support the outside bar setup.
You might also look at other technical indicators such as the RSI or MACD to confirm the direction of the trend or identify potential entry and exit points.
Once you have confirmed the trade entry and determined your position size, you can enter the trade. It’s important to set stop-loss orders to limit potential losses and monitor the trade closely. You may also want to consider taking partial profits if the trade moves in your favor.
OUTSIDE BAR FOREX TRADING STRATEGY RULES
You’ve identified a setup and need to know how to trade it.
Here are the trading steps to follow:
To trade a bullish outside bar, place a buy-stop order 2-5 pips above the high of the outside bar. For a bearish outside bar, place a sell-stop order 2-5 pips below the low of the outside bar.
Keep in mind, a buy setup can be a red candlestick depending on the context. A green candlestick can also be a sell setup.
Set your stop loss on the opposite side of your trade entry, 2-5 pips away from the low for a buy-stop order and 2-5 pips above the high for a sell-stop order.
You have a few options for setting your take-profit target. You can target previous swing high points for a buy order or previous swing low points for a sell order.
Alternatively, you can aim for a profit that is three times your initial risk. For example, if your initial risk is 50 pips, your take profit target should be at a price level that will give you a 150-pip profit.
On the trade above, we have a strong setup:
The outside bar occurs at the support zone, takes out the low and then the price pulls back leaving a lower shadow.
Price is extended below the 20 simple moving average with 7 red candles pushing price down on this 4-hour chart.
Price ran 99 pips to the resistance zone on a risk of 26 pips.
Establishing Risk Management with Trailing Stops
The first step is to set stop loss orders. A stop-loss order is an order to close a trade at a predetermined price level to limit potential losses.
Setting a stop loss order ensures that you are not exposed to excessive losses if the trade moves against you. When setting a stop-loss order, it’s important to consider the risk-reward ratio of the trade and the overall market volatility.
Once your stop is set, consider using a trailing stop. This example trails the stop under each new candle low until stopped out.
HINT: Use a trailing stop when support or resistance targets are far from your entry level. Closer targets have a higher probability of being hit.
Another important aspect of risk management is determining your position size.
Position sizing involves determining the amount of capital you will allocate to a single trade. This is an important factor to consider because it affects the potential profit and potential loss of the trade.
You should aim to risk no more than 1-2% of your trading account on any given trade.
You can find a good Forex position sizing calculator here
It’s also important to monitor the trade and adjust your stop-loss orders as needed. For example, if the trade moves in your favor, you might want to adjust your stop loss order to lock in some profits.
If the trade moves against you, you might want to adjust your stop loss order closer to the price to limit potential losses.
It’s important to have a trading plan and stick to it. This means having a predetermined exit strategy and not deviating from it.
You need a clear idea of when you will exit the trade, either at your profit target or if your stop loss order is triggered. This helps to avoid emotional decision-making, which can lead to impulsive and potentially costly trades.
What Are The Disadvantage Of The Outside Bar Trading Strategy
Stop-loss distances can be large (the larger the timeframes used, the larger the stop loss), which means you need to calculate lot sizes based on the risk you are willing to take. This generally means small position sizing.
Quick wins are not common. The outside bar has already moved a distance by overtaking the entire previous candlestick. You may have the next few periods being sideways price action.
Outside bars in Forex are all over the chart. Avoid trading them without some other variable such as support/resistance zones.
Advantages Of The Outside Bar Forex Trading Strategy
It is a simple trading strategy that has very few rules or needed indicators.
The outside bar is an obvious candlestick to find on a chart.
The potential for large moves is present as trapped market participants run to the exits when the outside bar takes out their stop.
Q: What is an outside bar trading strategy?
An outside bar trading strategy is based on the formation of a single candlestick pattern, known as an outside bar. It involves placing buy-stop or sell-stop orders 2-5 pips above/below the high/low of the outside bar and using a stop loss and take profit to define your risk/reward.
Q: How do I set my take-profit target?
You have a few options for setting your take-profit target. You can target previous swing high points for a buy order or previous swing low points for a sell order. Alternatively, you can use a risk-reward ratio to calculate your take-profit target. For example, if your initial risk is 50 pips, your take profit target should be at a price level that will give you a 150-pip profit.
Q: What are the advantages and disadvantages of an outside bar trading strategy?
The main advantage of this strategy is its simplicity and the potential for large moves by trapping traders. However, it also has some drawbacks such as large stop-loss distances, which can lead to small position sizes, and the abundance of outside bars on charts that may not be meaningful. Additionally, quick wins are not common with this strategy.
The outside bar Forex trading strategy can be a great way to capitalize on market moves. With its simple rules and potential for large profits, it is an accessible strategy that many traders can benefit from.
While there are some drawbacks associated with this strategy, such as large stop-loss distances and quick wins not being common, it can still be a great tool in the right hands.
As long as you have a clear trading plan and are willing to stick to it, the outside bar trading strategy can offer traders an effective way to capitalize on market moves.
Updated: March 14, 2023
Published: Jun 7, 2015