The Outside Bar Candlestick Strategy
Hello, traders. Welcome to the Price Action Course on the sixth module, Price Action Strategies. In this lesson I’m going to teach you how to trade the outside candle strategy. Unlike the inside bar setup, this is a reversal plan that we are going to try to find the end of correcting moves and at the end of strings. And remember that these strategies that we are learning on this module are going to help you when you’re analyzing the entire chart with the price action and even with order flow analysis because these formations or these strategies are going to help you confirm that your trade idea is the correct one.
Now let’s start by defining what an outside candle is. Contrary to the inside bar, the outside bar exceeds both the high and the low of the previous candle. The high of the second bar is higher than the high of the previous bar and the low of the second bar is lower than the low of the previous bar. We will be looking at these patterns at the end of correcting moves or strings. This means that outside candles are reversal patterns.
Now here’s an example. As you can see here, I just copy and paste three candles where you can see that we were in an up move and then we have an outside candle. You can see that the low of the third candle, well the second candle, the bearish candle, is way below the low of the previous candle and the high of this bearish candle is way above the high of the previous candle.
Now what this means is the price was going in an up move and then went all the way up here. But price encountered a very strong bearish pressure that made price drop below the lows of the previous candles. So the bullish pressure that pushed price to this level made this candle exceed the high of the previous candle, but the enormous bearish pressure that was encountered at this level made it that this candle break with the previous low or the previous candle’s low, making this an outside candle. And as you can see, because of what I just explained to you, this is a reversal pattern. We were in an up move, we were breaking with the previous highs, but then we encounter a very strong bearish pressure that made the candle close all the way down here, making this an outside bar and a very strong reversal pattern.
Now, how do we trade this? The way to trade it is to enter the breakout of the outside candle’s range. This means that in an up move we are going to go long at the break of the high and in a down move we are going to go short of the break of the low. This means that right here at this example we were in an uptrend and after the down move we are going to go short when we break with this candle’s low. And the reason is because after these candles, we might encounter some bullish pressure that is going to try to reverse these normal candles to the downside and this is why we are just going to wait for this wrench to break. Well, in this case to the down side, but if we were in the opposite scenario, to the upside for us to be in the market. And of course, in this scenario, because we are counter trend trading, we are going to put our stops at the high or the second candle or at the high of the range.
Now, we’re going to go through a few charts and we’re going to look at some outside candle setups for you to understand how this is traded.
Hello traders. We are back. And this is the E-mini contracts for the DOW Jones Industrial Average, the YM. Now, I wanted to show you this chart because right here we have a very nice outside candle at the end of this move. You can see that we are in a very strong up move because the slope of the up move is very steep. And then right here we encounter what looks to be an outside bar. Now, we have an outside bar here because we are at the top of a move and because the high of this bearish bar is higher than the previous bar. And the low of this bearish bar is lower than the previous bar. Now, you can see that the next candle breaks with the low of the candle but fails to close above. And this is what I’m telling you guys. Let me just get rid of this for a second and let’s just have the actual outside candle in front of our eyes. Now here’s the formation and here’s the range.
Now, the next candle fails to close below this range, so we are not going to go short just yet. And the reason is because both my getting control of the market and push price higher and we need a close below the lows of the range. And we get an actual close right here, so we are going to go short at the close of this candle and we are going to risk 182 points on the DOW Jones. And remember your training, guys, and remember your price action training. And remember to always look for zones where price might bounce and you can also look for zones using key ratios. So you can see that right here we have an actual zone where price is very likely to bounce back, so we can actually put our target right here. So we go short and we are risking 182 pips and we are actually aiming to win 235 pips. So this is how you are going to be trading the outside bar at the top of the moves. You can see the price went all the way to this high. We had an outside bar, then a reversal and now we are just waiting for price to hit our targets.
Okay, so what we are going to do right now is we’re going to go to the Euro/USD forward chart and then we’re going to try to find some outside bar setups, a correction to the outside on this down move. And you can see that the first outside bar that we encounter is this one right here. And you have to be very, very careful when trading outside bars. Right here we have the first outside bar. You can see that the high of the second bar is higher than the high of the previous bar and the low of the second bar is lower than the low of the previous bar. So what are we waiting for right here? We are waiting for this range to break. And the cool thing about it is that this candlestick breaks and the second cool thing about this setup is that this candle is also an outside candle. You can see that this candle is also an outside candle at the same area of pullback. Price went all the way down here and then it pulled back to these highs.
Now, this is the actual area that we are looking for. We are going to use the first outside candle. You can see that the low of the second candle is lower than the low of the first candle, and the high of the second candle is higher than the high of the second candle. And right here I’m going to figure this out for you guys so you can better watch it. And you can see that this candle breaks with the actual range of the outside bar. Just let me point out the actual range of the outside bar and let me point out the actual setup, okay?
So when this candle breaks, we go short right here and we risk about 136 pips and because we are using price action to trade, we are going to look for very specific candlestick formations that are going to show us rejection. Now, the first candlestick that shows us a little bit of rejection is this one. But I’m not entirely convinced about it. So what we’re going to do after this huge candle and this candle prints, we are going to move our stops right here at the top of this candle. So we are locking in 164 pips by moving our stops right here. And then price moves all the way down here and this pin bar prints. And when this pin bar prints, we close our trade because we know that at the end of aggressive moves to the downside, if a heavy pin bar is printed, we know that we have encountered an opposite pressure that might turn around or roll over the market.
So we close our trade for a full profit of 327 pips. And this is just using the strategies that we just learned. We are using the outside bar strategy at the end of a pullback to get it on the main move and we are using a pin bar formation to determine that our trade is over. So every time you analyze the markets and every time you choose your levels and every time you draw your trend lines and trend channels, look for these formations or these setups at key spots after a correcting move or at the end of a string for you to be able to capitalize on reversals.