The definition of an outside bar is a price bar with lower low and higher high than the previous price bar.
This pattern is considered an important market signal, one often seen at both tops and bottoms on multiple timeframes.
Outside bars are also named engulfing patterns.
Here’s one on the GBP/USD.
In the highlighted area, the blue bar makes a lower low than the previous red bar, before changing course, moving higher taking out the high the same bar.
In this post, I’m going to discuss a nifty little way I trade them. A technique I’ve termed the Aggressive Outside Bar strategy.
What is an Aggressive Outside Bar?
No, it’s not some boozer in a dodgy part of Liverpool or East London.
It is, in fact, a highly profitable setup. One going unnoticed by many traders.
When it works it works well.
But it’s not all plain sailing, sometimes there are spectacular failures, something I’ll discuss later.
So how does an AOB work?
Well, while other outside bar techniques require the price bar to complete the session first, with this strategy, orders are placed before the session has actually closed.
This adds an air of aggressiveness to it, hence the name.
What to do
If you observe a number of outside bars, you’ll notice with bullish ones, they often end strongly, rallying far above the previous high.
And with the bearish ones, they often fall heavily, far lower than the previous low.
The Aggressive Outside Bar strategy aims to capture this momentum as it’s in the making.
The vast majority of traders will wait for the close.
And, then enter on some pullback technique, or on a break higher or lower of the outside bar itself.
What a complete waste of both time and profit (in my humble opinion)!
Here’s how you’d handle a short side entry with this technique.
- The live price bar needs to go above the high of the previous bar
- Then, place an entry order two pips below the low of the previous bar
- If the order is not triggered by the close of the current bar cancel order
- If triggered, place a protective stop at the high of the previous bar
Below is a recent example of an AOB short in the gold market.
Here is the same price action again but on a one-hour chart.
Daily charts can be deceptive
The daily chart can be deceptive, especially when it comes to this setup.
The daily doesn’t give a full representation of what happens during a trading session.
For example, you can’t tell if the price high of the previous day was broken before, or after the low was broken.
Also on a daily view, neither can you tell if the AOB trades I’m showing you were stopped out as losses or not.
With this system, we place protective stops at the high or low of the previous bar, depending on trade direction obviously.
Setups on a daily can look great, but you couldn’t tell from viewing a daily chart if the trade actually worked or not.
And the last thing I want to be is disingenuous, which is why I show the hourly chart too.
Here is another that worked.
What can go wrong?
These setups work – have no fear of that.
But here are a few things I’ve noticed about them.
They don’t work so well when then the previous bar is an inside bar.
They don’t work so well, when going long, the previous bar has a bullish close.
And when going short, the previous bar has a bearish close.
They can fail miserably when the low of the live bar falls far below the low of the previous bar.
Or, when the high of the live bar, rises far higher than the high of the previous bar.
This is the most likely time you’ll be stopped out for a 1R loss.
The Aggressive Inside Bar is a reversal strategy. A powerful one at that.
And market participants are left shell-shocked when they happen.
Think about it.
Traders expect a bullish rally after short-term resistance is breached.
They go all in, confidence runs high when out of the blue, the price plummets and breaks support.
Likewise, bears think they’re in control as short-term support breaks. Then some catalyst changes market sentiment, and a furious rally follows.
Short’s are wrong-footed and panic buying sets in.
These fast price reversals can be found especially after much-anticipated news events, payroll numbers, Fed meetings, Opec meeting etc
Expect many cancelled orders, when trading them.
Markets making higher highs rarely reverse.
Markets making lower lows rarely reverse to the upside either.
Wherein lies the beauty of this pattern.
Traders get complacent and end up trapped when the price does reverse on them.
When market participants expect one thing, and the opposite happens – that’s the time the big money is made.
This is why I like this setup so much.