![]() In the next article we shall talk about the inside-inside and its more reliable version, the inside-inside-inside pattern. This will push the price even higher, leading to that strong move we discussed. However, because all market participants want the same thing, it will not happen, since both counterparts will impatiently buy as soon as the price declines by several pips, instead of waiting for it to decline by 1-2 bars. Both sides want to see the price going down, so that bears can reduce their losses and bulls can enter long positions and profit now that sentiment has turned bullish. ![]() As the price reverses upward after bears have shorted below the previous bars low and traps them in, some bulls are trapped out because they dont like entering during the formation of outside bars. The strength of such a reversal is explained by the impatience of both bulls and bears. There are usually two legs up from the bottom of the outside bar. If the reversal is too strong, it will form a second leg up after a pullback. With bears exiting the market, and overall sentiment being predominantly bullish, the market will keep rallying. Once that happens, trapped bears who shorted below the previous bars low will cover their shorts, pushing prices even higher, and will stay away from the market for some time. This will push the current bars high above the prior ones, thus, making it an outside up bar. If they feel especially confident, bulls can act even more aggressively and buy below the previous bars low, instead of above its high, thus, increasing the bullish sentiment. Less traders will sell below the previous bars low and more will buy above its high, as it marks a higher low. If, for example, we have a bearish trend followed by a strong upward correction, market players will be looking for a rise in the price. This can be observed when a with-trend outside bar occurs at a reversal from a strong trend. In certain cases, outside bars can be seen as strong trend bars instead of range bars. Traders would want to go long as soon as the outside bar goes beyond the previous bars high or just wait for it to close and buy above its own high. Adding to that strength, the bar closed near its high, while opening close to its low, suggesting bulls were pushing the market up. Moreover, there were several bullish candles close before it that provided some additional strength. You can see in the example above that an outside up bar formed after a two-legged correction in a strong uptrend, which is a reliable long entry signal. Outside bars can act as an entry bar at the bottom or the top of corrections. If the market suddenly reverses and forms an outside bar, your order will be executed, thus, making it an entry bar. For example, if the trader expects a major reversal during a bullish trend and a strong bearish bar occurs, but the next bar trades higher, you should keep your sell stop in place. Outside bars are very useful as entry points when the preceding bars give away a reliable signal. If the market breaks out in either direction, you should look to enter against it, because outside bar breakouts usually fail within a few bars. Most of these outside bars even form inside-outside-inside patterns as well (we will discuss those later in the article), but due to the trading range, they do not provide reliable enough entry signals.Īnd because outside bars are an indication that the market is moving sideways, thus, everyone will sell near the top of the range and buy near its bottom, it would not be wise to use them as entry points, unless they are followed by a small bar near their high or low that would mark a breakout attempt. You can see several outside bars pointed by the arrows, which close near their middle and are basically one-bar trading ranges, which adds to the overall sideways trading. As you can see from the example, a decent amount of outside bars can be seen at a chart at any time, but they alone dont tell us much, especially if the market is in such a distinctive trading range like pictured above.
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