Forex trading is full of patterns that help traders find good trade setups. One powerful pattern is the outside bar. This pattern can show strong price movements and help traders spot reversals or trend continuations.
In this guide, we will explain outside bars forex trading, how they work, and how you can use them to improve your trades. We’ll cover how they form, why they matter, and how to trade them with simple strategies.
What is an Outside Bar?
An outside bar is a candlestick pattern where the current candle is larger than the previous one. It completely covers the highs and lows of the previous bar. This means that price action is strong and could signal a new trend direction.
How is it Different from Other Patterns?
- Inside Bar: The opposite of an outside bar. The inside bar stays within the high and low of the previous candle.
- Engulfing Candle: Looks similar to an outside bar but focuses more on closing prices, not highs and lows.
Outside bars show a big battle between buyers and sellers. The winner decides the market’s next move.
Why Do Outside Bars Happen?
Outside bars form because of strong market activity. This can be due to:
- High Volatility: Sudden price moves caused by major market players.
- News Events: Economic reports, interest rate decisions, or political events can cause big price swings.
- Breakout Moments: When price moves past a strong support or resistance level.
For example, if the EUR/USD pair forms an outside bar after a US Federal Reserve decision, it may indicate a big shift in trend.
Trading Strategies for Outside Bars
There are two main ways to trade outside bars forex trading: as a trend continuation or a reversal signal.
Trend Continuation Strategy
This method is used when an outside bar appears in an existing trend.
How to Trade It:
- Identify an uptrend or downtrend.
- Wait for an outside bar to form in the direction of the trend.
- Enter the trade when the price moves beyond the outside bar’s high (for a buy) or low (for a sell).
- Place a stop-loss below the low (for buys) or above the high (for sells).
- Set a profit target at 2x or 3x the risk.
Example: If USD/JPY is trending up and forms an outside bar, a trader might buy when price moves above the bar’s high.
Reversal Strategy
This method is used when an outside bar signals a possible trend change.
How to Trade It:
- Look for an outside bar at a major support or resistance level.
- If the bar appears at the top of an uptrend, consider selling. If it forms at the bottom of a downtrend, consider buying.
- Enter the trade when price moves beyond the outside bar in the opposite direction.
- Place a stop-loss beyond the outside bar’s high or low.
- Set a profit target using the next key level.
Example: If GBP/USD has been rising but forms an outside bar near a resistance level, it may be a sign to sell.
Advanced Techniques for Outside Bars Trading
To improve accuracy, traders often use outside bars with technical indicators.
Combining Outside Bars with Moving Averages
- If an outside bar forms above a 50-day moving average, it may confirm a bullish trend.
- If it forms below, it may confirm a bearish trend.
Using RSI (Relative Strength Index) with Outside Bars
- If RSI is above 70, and an outside bar forms at resistance, it may be a strong sell signal.
- If RSI is below 30, and an outside bar forms at support, it may be a strong buy signal.
Finding Lower Timeframe Setups
- Check smaller timeframes (like 15-minute charts) to refine entry points.
- Look for confirmation like increased volume or another trend signal.
These advanced techniques help traders filter false signals and improve trade accuracy.
Risk Management for Outside Bars Trading
Trading outside bars can be profitable, but risk management is important. Here’s how to protect your account:
- Use Stop-Loss Orders: Always set a stop-loss to limit potential losses.
- Manage Position Sizes: Never risk more than 1-2% of your trading account on a single trade.
- Avoid Overtrading: Not all outside bars lead to strong moves. Stick to high-quality setups.
Using Outside Bars in Different Market Conditions
Outside bars forex trading can work in various market conditions, but traders need to adjust their approach based on the trend, range, or volatility levels.
Trending Markets
- Best strategy: Use outside bars as a trend continuation signal.
- How to trade: Enter a trade in the direction of the trend when price breaks the outside bar’s high or low.
- Example: If EUR/USD is in an uptrend and an outside bar forms with a higher close, it’s a strong sign to go long.
Range-Bound Markets
- Best strategy: Use outside bars as reversal signals at support and resistance levels.
- How to trade: Look for an outside bar near the top or bottom of a trading range.
- Example: If GBP/USD is stuck in a sideways range and an outside bar forms at resistance, a sell trade could be a good option.
High-Volatility Markets
- Best strategy: Use wider stop-losses and smaller positions to handle price swings.
- How to trade: Wait for confirmation from another indicator before entering a trade.
- Example: After a major news event, an outside bar forms on USD/JPY. Instead of jumping in right away, confirm with RSI or moving averages before trading.
Best Currency Pairs for Outside Bars Trading
Some currency pairs work better for outside bars trading because they have strong trends and clear movements.
Major Pairs (Best for Beginners)
- EUR/USD, GBP/USD, USD/JPY – These pairs have high liquidity and smoother price action, making outside bars easier to trade.
- Best approach: Trade outside bars during major trading sessions for the best price action.
Commodity Pairs (Good for Volatility)
- AUD/USD, USD/CAD, NZD/USD – These pairs react to commodity prices and can create strong outside bars after news events.
- Best approach: Use outside bars on daily or 4-hour charts for bigger moves.
Exotic Pairs (Higher Risk, Bigger Moves)
- USD/ZAR, EUR/TRY, USD/SGD – Exotic pairs move quickly and can create large outside bars.
- Best approach: Be cautious with stop-loss placement to avoid getting stopped out by price swings.
How to Backtest and Improve Your Outside Bars Strategy
To succeed in outside bars forex trading, traders need to test their strategy before using it with real money.
Use a Demo Account
- Open a demo account with a broker like Defcofx and trade outside bars in real-time without risking money.
- Track your trades and note which setups work best.
Backtest on Historical Data
- Use trading platforms like MetaTrader 4 or 5 to replay past charts and see how outside bars performed.
- Look for patterns in different market conditions.
Track Performance in a Journal
- Keep a record of outside bar trades, noting entry, exit, and results.
- Identify what works best and make adjustments.
Psychology and Discipline in Outside Bars Trading
Trading outside bars forex trading is not just about strategy. It also requires patience, discipline, and the right mindset. Many traders fail not because their strategy is bad, but because their emotions take over.
Avoid Impulsive Trading
- Seeing an outside bar doesn’t mean you should jump into a trade immediately.
- Always wait for confirmation, such as a break of the high or low or confluence with another indicator.
Control Your Emotions
- Losses are a part of trading. If a trade doesn’t work out, stick to your plan instead of chasing revenge trades.
- Don’t let fear or greed push you into bad trades.
Stick to Risk Management
- Even if an outside bar looks strong, never risk more than 1-2% of your account per trade.
- Use stop-losses properly and avoid overleveraging, even when trading with a broker like Defcofx, which offers high leverage up to 1:2000.
Have a Consistent Routine
- Set a trading schedule and avoid overtrading.
- Review your trades at the end of each week to find ways to improve.
Common Mistakes Traders Make
Even though outside bars trading is simple, traders often make mistakes.
Here are the most common ones:
- Trading Every Outside Bar: Not all outside bars are reliable. Use other indicators for confirmation.
- Ignoring Market Conditions: Outside bars work best in trending markets, not sideways markets.
- Not Setting a Stop-Loss: One bad trade without a stop-loss can wipe out multiple wins.
Conclusion
Outside bars forex trading is a powerful strategy that helps traders spot strong market moves. Whether you use it for trend continuation or reversals, the key is to wait for confirmation and follow a solid trading plan.
Choosing the right broker is also important. Defcofx offers tight spreads from 0.3 pips, high leverage up to 1:2000, and fast withdrawals processed in just 4 business hours. With a 40% welcome bonus and 24/7 multilingual support, Defcofx provides a reliable trading experience for those looking to master outside bar trading.
With the right strategy, risk management, and broker, traders can use outside bars trading to make smarter and more profitable trades.
FAQs
What is an outside bar in forex trading?
An outside bar is a candlestick pattern where the current candle completely covers the high and low of the previous candle.
How do you trade an outside bar?
You can trade it as a trend continuation by entering in the same direction as the trend or as a reversal when it appears at key support or resistance levels.
Is outside bars trading reliable?
Yes, but it works best when combined with other indicators like moving averages or RSI for confirmation.
What timeframe is best for outside bar trading?
It depends on your trading style. Daily and 4-hour charts are best for swing trading, while 15-minute and 1-hour charts work for intraday traders.
Why should I choose Defcofx for forex trading?
Defcofx offers low spreads, high leverage, fast withdrawals, and excellent customer support, making it an ideal broker for forex traders using technical strategies.
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