The outside bar

An outside bar is a candle whose range goes beyond both the high and the low of the candle before it. It is the opposite of an inside bar: instead of a pause, it is a convulsion, a session in which price traded both higher and lower than the previous session's entire range. The close within its own range is said to show where the session's battle ended.

What defines an outside bar

The rule is simple: the high of the outside bar must be higher than the high of the previous candle, and the low of the outside bar must be lower than the low of the previous candle. The body of the outside bar can be anywhere within its own range, and the body of the previous candle does not matter. What matters is the range: the outside bar's range completely covers the previous candle's range.

A near miss is not an outside bar. If the high of the second candle is equal to the high of the first, the rule is not met, and the pattern is not flagged. The same applies to the low. The site's written rule is strict because a pattern that is almost there is a different thing from a pattern that is there, and the site does not want a reader to think a near miss is an occurrence.

The numbers behind the rule: rule OB-1 needs a bar whose high is above the previous bar's high and whose low is below the previous bar's low, with a range of at least 1.5 ATR (the average true range of the last 14 sessions), that closes beyond the previous bar's range, above its high or below its low. It counts as formed when that bar closes. An outside bar that closes inside the previous range is not counted.

How it differs from an engulfing pair

An engulfing pair is a two-candle pattern in which the body of the second candle completely covers the body of the first candle. The outside bar is a single candle whose range covers the entire range of the previous candle. The difference is range against body: the engulfing pair looks at bodies only, while the outside bar looks at the full range, including shadows.

An outside bar may also be an engulfing candle if its body covers the previous candle's body, but the two patterns are not the same. An outside bar can have a small body and long shadows, and it would still be an outside bar, but it would not be an engulfing pair. The outside bar is a wider condition, and it includes many candles that an engulfing pair would not.

What the close within its own range is said to show

The close of the outside bar is read as the result of the session's battle. If the outside bar closes near its high, it is said to show that buyers won the session: price traded below the previous low but then rallied to close near the top of the outside bar's range. If the outside bar closes near its low, it is said to show that sellers won: price traded above the previous high but then fell to close near the bottom.

A close in the middle of the outside bar's range is read as indecision: neither side managed to dominate. The close is a single piece of information, and it is not a forecast. It describes what happened during the session, not what will happen next.

Where the pattern fails

The outside bar is a wide-ranging candle, but a wide range does not guarantee a follow-through. Price can trade both above and below the previous range and then close back inside it, leaving the market exactly where it was. A trader who expects a breakout may be disappointed, because the outside bar itself does not say which way the next move will go.

A failed outside bar is common: the next candle may be an inside bar, or price may simply drift. The pattern describes what price has already done; it does not predict what it will do next.

What the chart under the heading shows

The chart under the heading is an outside bar on gold futures (GC=F). The previous session, 7 January 2020, ran from 1,558.30 to 1,576.30 dollars an ounce. The session of 8 January went above that high, to 1,604.20, and below that low, to 1,552.30, a range of 51.90, and closed at 1,557.40, below the previous low. It counted as formed at that close.

It is the cleanest by the rule's own measure of the 98 outside bars the rule found in ten years across three instruments. This one closed down; the rule accepts a close above the previous high as well. The chart shows the bar, not what the market did in the sessions after it.

Patterns describe, they do not predict

An outside bar is a description of what price has already done: a candle that traded beyond both the high and the low of the candle before it. It is not a forecast of what price will do next. The pattern does not say that a breakout will happen, and it does not say which way the breakout will go. It only says that price moved widely.

A reader who sees an outside bar on a chart should read it as a wide-ranging session, not as a signal. The pattern is a useful way to see where price expanded, but the next move is not written in the pattern. The pattern describes; it does not predict.

What the count says

Over ten years rule OB-1 found 98 outside bars: 16 on the iShares MSCI Philippines fund, 29 on the PLDT ADR and 53 on gold futures. As with the inside bar, the number is large because the definition is permissive: a range of 1.5 ATR and a close beyond the previous bar's range.

The count does not separate bars that closed up from bars that closed down, and it does not say what followed. It says how often the written definition was met on these three series.

An outside bar can mark the start of a failed breakout

An outside bar often appears right after a breakout from a tight range. The initial move looks decisive, but the outside bar's high and low exceed the prior bar in both directions. This means sellers pushed price below the breakout level before buyers recovered by the close. The pattern shows that the breakout lacked follow-through, at least on that first day.

When the close is near the middle of the range, the outside bar becomes a warning sign. It suggests neither side controlled the session. A trader who entered on the breakout now faces a decision: hold through the noise or exit on any further weakness. The outside bar does not predict the next day, but it shows the breakout was not clean.

The outside bar works as a volatility signal, not a direction signal

Because an outside bar has a range larger than the previous bar, it is by definition a volatility expansion. The market has become more active. This alone is useful information, even when the directional meaning is unclear. For a reader watching a quiet chart, an outside bar can be the first sign that conditions are changing.

Volatility expansion often precedes a sustained move, but the outside bar does not say which way. The close within the range can hint at it: a close near the high suggests buyers absorbed the selling pressure, while a close near the low suggests sellers won the day. Yet many outside bars are simply noise in a larger trend.

The outside bar after a long trend is often a profit-taking pause

When an outside bar appears after a long advance or decline, the most common explanation is profit-taking. Traders who were already in the trend use the wide range to reduce positions. The bar's high and low capture both the last push of the trend and the first serious countermove. The close then shows whether the profit-taking overwhelmed the trend.

This is different from a reversal pattern. A reversal pattern implies a change in the balance of power. An outside bar after a long trend may simply be a pause. The trend can resume the next day if the profit-taking is absorbed. The outside bar only shows that, for one session, both sides were active.

The close within the range matters most when the outside bar is small

Not all outside bars are huge. Sometimes the previous bar is very small, so the outside bar only slightly exceeds its high and low. In that case, the close within the range carries more weight. A close near the high on a small outside bar shows a modest but real shift toward buyers. A close near the low shows the opposite.

When the outside bar is very large, the close is less informative. A huge range means price travelled far in both directions. The close near the middle on such a bar is almost meaningless. The market was simply chaotic. The pattern's size relative to recent bars matters more than the exact position of the close.

An outside bar can trap traders who act on the first breakout

The most common mistake with an outside bar is to trade the initial breakout. When price first exceeds the prior bar's high, it looks like a buy signal. When it first falls below the prior bar's low, it looks like a sell signal. But the outside bar by definition does both. Traders who enter on the first breakout are often stopped out by the second.

This is called a double stop. A buyer enters as the high is broken, places a stop below the low, and then watches price reverse and hit the stop. The outside bar is the perfect pattern for this because it contains both a new high and a new low. The pattern does not cause the stop-out; it simply describes a session where both levels were tested.