Trading Price Action Trends

Chapter 7

Outside Bars

If the high of the current bar is above the high of the previous bar and the low is below the low of the previous bar, then the current bar is an outside bar. Outside bars are complicated to read because both the bulls and the bears were in control at some point within the bar or the prior bar, and there are many subtleties in their analysis. The increased size of the bar means that bulls and bears are willing to be more aggressive, but if the close is near the middle, it is essentially a one-bar-long trading range. In fact, by definition, since an outside bar totally overlaps the prior bar, every outside bar is a part of a trading range, which is two or more bars that largely overlap. At other times, they can act as reversal bars or trend bars. Traders must pay attention to the context in which they occur.

Traditional technical analysis teaches that outside bars are setup bars for a breakout in either direction, and that you should put an entry stop above and below. Once filled, double the size of the unfilled stop and make it a reversal order. However, it is almost always unwise to enter on a breakout of a 5 minute outside bar, especially if the outside bar is large, because of the greater risk that the distant stop entails. Sometimes they occur when you are looking for a major reversal and you are very confident that there will be a large, strong reversal. When that happens, it makes sense to enter as soon as the bar takes out the extreme of the prior ...