Outside Bar Pattern | Definition, Examples & Trading 

The outside bar pattern is a two-candle price action trading setup for identifying breakouts. Here, one candle is a large or ‘mother’ bar that engulfs an adjacent smaller ‘bar.’ The former is said to be ‘outside’ the latter – hence the term ‘outside bar.’ 

Examples of The Outside Bar Pattern

Let’s explore the essentials of trading this pattern and other useful information to increase efficiency. Here are the three scenarios where this pattern happens in the markets.

Outside Bar in an Uptrend

• Description: Here, the price is trending upward. The outside bar forms to signal a pause in the move.
• Implication: If the market breaks above the outside bar’s high, it suggests the uptrend will probably continue.

Outside Bar in a Downtrend

• Description: The appearance of the outside bar in a downtrend would reflect renewed selling pressure.
• Implication: If the price breaks below the outside bar’s low, it typically signals a continuation of the downtrend
  

Outside Bar in a Range

• Description: Outside bars within a ranging market indicate temporary volatility spikes and uncertainty, which can trap both buyers and sellers.
• Implication: Consolidation represents indecision. Usually, a strong breakout happens as a consequence, marking the potential start of a new trend.

We’ll soon review some examples of this pattern in these instances. 

What Is a Bullish Outside Bar Pattern?

This pattern contains a small red-coloured candlestick (outside bar) on the right side next to the range or body of a larger green-coloured candlestick (mother bar). It indicates a reversal of a bearish trend or a continuation of a bullish trend.

We can assume that the bulls or buyers are getting stronger and have reversed the bearish sentiment. This results in a breakout to the upside.

What Is a Bearish Outside Bar Pattern?

This pattern has a small green-coloured candlestick (outside bar) contained left to the range or body of a larger green-coloured candlestick (mother bar). It suggests a reversal of a bullish trend or the continuation of a bearish one.

Psychologically, it depicts uncertainty among buyers and growing power from the sellers, leading to a downward breakout.

What Does the Outside Bar Candlestick Pattern Mean?

Depending on the context, the outside bar reinforces the current momentum or suggests a momentum shift. In a trend, one group of traders remains dominant over another and will likely continue doing so. During a reversal, momentum moves from one side to the other, which may be caused by a new fundamental event. 

Sometimes, there may also be a technical reason, like price being near a key support/resistance or so-called psychological level. Traders will quickly start taking profits. When the outside bar forms, it’s a telling sign that a major new move could happen.

How To Trade The Outside Bar Pattern

Below are the key things to know about trading the pattern successfully: 

• Find the right inside bar setup
• Enter the inside bar setup (including having a solid stop loss strategy)
• Choose your trading take-profit

Finding The Ideal Outside Bar Setup

You should look out for the following when trading this pattern:

• High momentum: Momentum plays a massive role in identifying breakout formations like this one. You’ll want to see the former rising on lower time frames after the pattern has appeared. The same applies after the breakout occurs, as this would give more conviction in entering the setup.
• Trending market: The outside bar pattern is applicable in many scenarios. However, the safest bet is with a strong, clear trending market. The formation of the outside bar pattern has elements of continuation (due to the larger candle relative to the smaller candle). Thus, you should primarily focus on identifying solid trends with it.
• Strong confluence: Confluence and confirmation are obviously key when trading chart patterns.

Note the following confluences with the outside bar:

• Support and resistance (include regular and from indicators like moving averages)
• Consolidation patterns (e.g., triangles, pennants, double tops/bottoms)
• Fibonacci retracements
• Trendlines

Let’s look at an example to illustrate the importance of strong confluence. The first is a daily chart of US oil showing an uptrend. Notice the outside bar circled in an ellipse. Although the move continued higher, this pattern formed at a random place. There would have been some confluence if it appeared on the trend line.

Our next example is Tesla’s weekly chart, which has more confluence. Firstly, we see the market broke the previous up-trending line. The outside bar in this scenario formed near the current downtrend line. 

These lines intersect close to this pattern, forming an excellent retracing point and confirming that the market would have continued trending lower (as it eventually did).

Entering The Outside Bar Setup

So, you’ve identified a well-defined outside bar pattern in a clearly trending market on a high time frame with confluence. Performing an optimal entry is quite challenging. Still, we believe it’s better to be conservative than aggressive in your approach. 

An aggressive method is quite standard: simply enter using a limit or manual once the market breaks above/below the mother bar. The main benefit is you are certain to be in the trade. Unfortunately, your entry may be at a less-than-ideal price, and a false breakout may occur.

The conservative technique is to wait for a retest after the breakout. The hope is that the price retraces  61.8% to 78.6% of the formation (which you can measure with Fibonacci). While a trader can receive a favourable entry to boost their reward potential, they may miss out if the market continues to break out. Furthermore, the price could retrace at a shallower level i.e., it may not reach 61.8%.

Now let’s get onto stop loss techniques, which are the final piece for a solid entry into the outside bar:

• Classic: placing the stop loss below/above the low/high of the mother bar.

• Outside Bar Low/High Stop: placing the stop loss below the low/above the outside bar’s high. While allowing for less ‘leeway’ in your stop, this may work for traders seeking tighter risk management and higher reward potential.

• ATR-based stop: The Average True Range (ATR) indicator advises you how many pips/points/ticks a market has moved within a particular time frame. This tool can help traders looking to adapt their stop loss based on market volatility.

The ATR can guide traders on how wide the stops may be. Still, you will want to place some distance above or below the outside bar instead of randomly.

• Moving average stop: Moving averages are another indicator traders can use to place their stops. It may act as a ‘dynamic stop’ (i.e., moving the stop loss along the trail of the MA). Simply put, traders would place their stop below the indicator (e.g., 20 or 50 MA) in a bullish outside bar setup or above the indicator in a bearish outside bar setup.

• Fibonacci stop: Fibonacci can also help with stop loss placement. Traders can opt to use retracement levels of the outside or mother bar. The 78.6% (or higher) is an effective and distant spot, reducing the chances of a premature exit.

Choosing Your Trading Take Profit (Goal Of The Setup)

If your setup works out as planned, a solid profit-taking plan should be in place. It makes sense to target the nearest key support or resistance zone. This is because the market expects to stall around these areas (due to their historical significance), making it the perfect place to exit.

Above is an example of an uptrend on the daily chart of USD/CHF. We see a bullish outside bar pattern near the trend line. The 0.92448 level was the obvious key resistance in this instance, so you would have considered taking profits around this area. Notice that the market almost exceeded this area before retracing, proving how significant support and resistance levels are.

We recommend using the Fibonacci retracement tool to close profits manually as the market moves in your favour. Instead of waiting indefinitely for the market to hit a key level (with no guarantee of success), some traders use a trailing stop to close out gains at fixed increments for a more stable profit-taking approach.

However, this method risks cutting the trades short and potentially missing a larger profit that could have been made by letting the market touch a support or resistance level.

The Pros And Cons Of Trading The Outside Bar Pattern

Here is a summary of the pros and cons of outside bar trading:

What Is The Hit Rate Of The Outside Bar Pattern?

As with most chart patterns, the outside bar gives traders a 50/50 chance of success. This is because the market will only travel in two directions at any time. However, some traders may achieve up to 65%, improving the odds by:

• Trading with the prevailing trend: The outside bar pattern naturally suggests that the current momentum (due to the size of the mother bar) is likely to continue. While there are some cases of false breakouts, outside bars tend to be more reliable in strong trends.

• Employing the highest possible risk-to-reward ratio: Look for outside bar setups where you can potentially gain at least three times your risk. This means that even a 50% (or lower) win rate would result in a profitable track record with the pattern. Implement effective stop loss placement in this regard.

Adding the most confluence also improves your odds. Here are factors to consider in your analysis:

• Momentum confirmation: Look for high momentum as you make your entry into the outside bar pattern to decrease the chances of a false breakout
• Support and resistance levels: Align the outside bar with a key support or resistance zone (if possible), which usually act as powerful pullback areas
• Use additional indicators like moving averages (to determine trend strength) and the Relative Strength Index (to measure momentum and divergence)

How Does The Outside Bar Pattern Fail?

False breakouts are the core dire consequence of a failed outside bar pattern. This is where the price action appears to break above or below the previous bar but swiftly reverses in the other direction. 

There could be many reasons leading to this event, e.g., sudden fundamental or macroeconomic factors or a misalignment of market context. Unfortunately, achieving a near-perfect win rate with the outside bar pattern is impossible. This is why you should trade with the prevailing trend, use the best risk-to-reward ratio, and add as much confluence as possible. 

Which Strategies Can You Use With The Outside Bar Pattern?

Here is a brief summary of them below:

Trend Continuation Strategy

• Look for an outside bar in the direction of the prevailing trend (what we’ve referenced numerous times here).
• A bullish outside bar in an uptrend suggests it may continue, so enter a long position above the bar’s high.
• A bearish outside bar in a downtrend signals that it may persist, so short below the bar’s low.

Reversal Strategy

• An outside bar appearing at key support or resistance levels (or other confluent levels confirmed via a chart pattern or indicator) can indicate a reversal.
• A bullish outside bar at support suggests buyers stepping in – buy above the high.
• A bearish outside bar at resistance indicates selling pressure – short below the low.

Breakout Strategy

• If an outside bar forms at a consolidation zone (e.g., range or triangle), it can signal a breakout.
• Enter when the price breaks above the outside bar’s high (bullish) or below its low (bearish).

Inside Bar Fakeout Followed by an Outside Bar

• Sometimes, traders get trapped by an inside bar fake breakout, and then an outside bar appears in the opposite direction.
• Example: A bullish inside bar breaks upward, but then a large bearish outside bar appears → Strong short signal.

What Are Alternatives To The Outside Bar Pattern?

Here are some alternatives you should explore that can allow you to respond to various situations in the market:

• Pin bar: The pin bar is a classic rejection candle that you can trade in trending and reversal markets, specifically at key support/resistance levels). It has a single candlestick with a noticeably long wick compared to its small body (usually a third or fourth of the wick’s length). The word ‘pin bar’ refers to ‘Pinocchio,’ as the body is said to have a nose-like appearance – this simply shows the small difference between the low/high of the close). 
• Three-bar reversal: This three-candle formation can appear in trend pullback and reversal setups. The pattern consists of two consecutive candles moving in one way, with the third often engulfing the two and closing in the other direction.
• Inside bar: This is the opposite of the outside bar. It consists of the same two-candle structure of a mother bar engulfing a smaller bar next to it. The pattern is traded in the same context (primarily trending scenarios). 

For ease of memory, the mother bar is on the left side with the outside bar (while it’s on the right for the inside bar pattern).

The Best Indicators To Use When Trading The Outside Bar

You can effectively combine the inside bar formation with various indicators (using standard settings) to enhance your trading strategy:

• Moving Averages (MA): Helps identify the overall trend. An inside bar near a key MA (such as the 50 or 200 EMA) may indicate a strong breakout.
• Relative Strength Index (RSI): Confirms momentum. If an inside bar forms when the RSI is overbought or oversold, it can signal how soon a breakout might occur.
• Volume Indicator: Low volume during consolidation followed by a volume spike can confirm the breakout direction.
• Bollinger Bands: Inside bars near the upper or lower band may suggest trend continuation or reversal.
• MACD (Moving Average Convergence Divergence): A MACD crossover near an inside bar can reinforce the trend’s strength and the breakout’s potential.

Learn Pattern Trading With The WR Trading Mentoring

There is power in trading patterns like the outside bar. Still, mentorship from WR Trading completes the puzzle, helping you identify high-profitability trade setups and create a proven, profitable strategy. 

Our course also focuses on key concepts like high risk-reward ratio analysis, trading plans, low time commitment, and the confidence to execute trades with precision.

Whether you’re a beginner or an advanced trader, our real-world insights and hands-on guidance will accelerate your success in the markets.

Conclusion: Mastering Inside Bars Through Strategy and Patience

The outside bar pattern is a powerful price action strategy for breakouts by traders. Still, it rarely forms perfectly (especially in higher time frames), with confluence and strategic execution being the key to success.

False breakouts are always a threat, but proper stop-loss placement and strong confirmation signals can improve win rates. Whether traded in its traditional breakout capacity or as part of a contrarian fakeout strategy, the outside bar remains a favourite of the modern trader’s arsenal.