Outside Bar

The candle's range is completely outside the previous candle's range. In other words, the candle's high is higher than the previous candle's high, and the candle's low is lower than the previous candle's low. On smaller time frames, an outside bar is characterized by a megaphone pattern, otherwise known as a broadening formation.

We can look at the outside bar as a signal of a rise in volatility, range expansion, or indecision. Usually, the close of the outside bar, as well as the overall trend, will help provide context.

There are 3 main methods for trading outside bars that I constantly watch for. This is the longest section in the handbook, as this is the pattern I am personally most passionate about.

With the continuation method, we are aiming to take full advantage of the outside bar before it has even formed. In a downtrend, we are looking for a short at a failed higher high, targeting a lower low. In an uptrend, we look for a long at a failed lower low, and target a higher high.

Here we have the 1 minute and the 20 minute. We are looking to enter this trade on the 1 minute, to take full advantage of the formation of the outside bar on the 20 minute.

• We are clearly in a strong uptrend, given the initial explosive move.
• After seeing an initial low made, we wait.
• When the lower low is made and fails to hold, we enter our long and target the higher high.

Now the 1 minute and the 15 minute, in a downtrend. For continuation, it is more important (in my opinion) to be able to recognize on a smaller time frame the beginning formation of an outside bar on a larger time frame.

• We're clearly in a downtrend.
• We see an initial high made. We wait.
• When the higher high is made and fails, we enter our short and target the lower low.

Unlike the continuation method, with the reversal method we are looking to take advantage of the outside bar after it has formed, with expectations of a trend reversal. We never want to enter on the fresh new low. We always wait for a retest!

A very strong outside bar on the daily time frame. It is also a bearish engulfing, giving us added confirmation that we are possibly seeing a reversal type outside bar.

Remember, we don't want to enter on the fresh new low made by this outside bar. We always want to wait for the retest, and you can see why: it took 5 days of retesting and rejecting the 50% and 61.8% retracement levels before confirming the reversal.

Just like the previous bearish example, this strong outside bar is also a bullish hammer, giving us a strong confirmation that this is a reversal type outside bar.

Remember, we wait for the retest. In this case, the following day perfectly held the outside bar hammer's 50% midpoint, and closed above the high. The next candle is an inside bar, which we already broke down in the inside bar section.

This is possibly the most advanced pattern to trade in this entire handbook, but also the most rewarding in my opinion.

It is similar in practice to method 1, in that we are trading the formation of the outside bar, but we're doing this on a larger scale (most commonly the daily time frame), and it involves an added factor: the previous day's 50% control point (midpoint).

• Entry 1, bearish: price has traded above PDH, but fails to hold, then retests and rejects.
• Entry 2, bearish: after trading above PDH and failing (required), price now fails to hold and rejects the 50% control point.
• Entry 1, bullish: price has traded below PDL, but fails to hold, then retests and rejects.
• Entry 2, bullish: after trading below PDL and failing (required), price now fails to hold below and rejects the 50% control point.

The daily time frame is where the outside bar is potentially forming. The 5 minute is where we execute the trade. There are 3 entry opportunities:

• First is the failure to hold below PDL, after price has traded below the level. This is required to actually create the outside bar (remember, outside bar = lower low and higher high).
• Second is a break above and retest of the previous day midpoint, before rallying to PDH and higher.
• Third is another retest and hold of the previous day midpoint (with a hammer), before rallying to more new highs.

The bearish version, with 2 entry opportunities:

• First is a failure to hold above PDH, after price has traded above it. This is required to actually create the outside bar.
• Second is a break below and retest of the previous day midpoint, before dumping to PDL and lower.

In both examples there is a dotted horizontal line (above PDH in the bullish example, below PDL in the bearish). This is a negative 50% Fibonacci extension. Adding this extension to your Fibonacci tool's settings will project an extension of exactly half of the distance between PDH and PDL. It is incredibly powerful and accurate; price is constantly making measured moves using the previous candle's magnitude.