The outside bar is a powerful price action pattern that often signals a potential reversal. 

Unlike single-wick setups such as a pinbar strategy, the outside bar forms when a candle’s high and low both exceed those of the prior candle, effectively “engulfing” it completely.

This wide-ranging bar represents a change in buying or selling pressure and illustrates the decisive battle, with one side clearly emerging stronger by the close. 

For traders looking at reversal setups, this pattern may provide a clear structural clue that market sentiment has shifted significantly.

Bearish Outside Bar

A bearish outside bar occurs at the end of a bullish upswing in price and sellers move in to overwhelm any buyer volume that is left in the market. The outside bar pushes above the prior candle’s high but then collapses through its low, closing below the low of the previous candle.

This sudden failure at higher prices can often signal price move exhaustion of the uptrend and may be the start of a bearish reversal.

• A: Prior advance (bull candles) → strong upward movement into resistance.
• B: Outside bar (bearish close) → candle exceeds both high and low of previous candle, closing down.
• C: Confirmation candle (bearish close) → follow-through selling that validates the reversal.

The NZDUSD 1-hourly chart below shows two examples of this setup in action:

Bullish Outside Bar

A bullish outside bar appears after a decline when buyers step in aggressively. The candle drives below the prior low but then rallies strongly, closing higher and engulfing the prior candle.

This shift signals that selling pressure has been absorbed, and buyers are likely taking control.

• A: Prior decline (bear candles) → downside momentum into support.
• B: Outside bar (bullish close) → candle exceeds both high and low of previous candle, closing up.
• C: Confirmation candle (bullish close) → follow-through buying that confirms the reversal.

The AUDJPY daily chart below shows two examples of this setup in action:

Stop Placement and Exits

A logical stop placement that indicates your trading idea may not have gone as you had hoped it might, and may be a placement beyond the extreme of the outside bar. 

Therefore:

• In bearish setups, a stop is placed above the high of the outside bar.
• In bullish setups, a stop is placed below the low of the outside bar.

Common additional exit approaches may include:

• Targeting the next key support/resistance zone,
• Using a fixed risk-to-reward ratio (e.g., 2:1 or 3:1),
• Or trailing stops behind subsequent highs/lows as the price moves in your desired direction to capture extended moves whilst locking in profit,

Final Thoughts

The outside bar is a clear visual signal that suggests a change in the balance of buyers versus sellers, where one side overwhelms the other. 

It may often offer a high probability of follow-through when it appears at significant levels of support or resistance.

Like all setups, outside bars are fallible. For example, choppy markets can generate multiple false signals, so combining the pattern with context trend alignment, confirmation candles, and other confluence factors such as increased volume may help improve signal reliability.

As always, it is worth reinforcing that an entry set alone will rarely be successful unless you have robust and unambiguous rules around the primary price action of an outside bar.

Testing what these factors are and which confluence factors may work for you across different markets and timeframes is critical in creating a complete trading strategy. Only then should traders add the outside bar to their price action toolbox.

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