Forex trading is a complex financial market that requires traders to have an in-depth knowledge of various technical indicators and patterns. One of the most popular and widely used indicators in forex trading is the outside bar. In this article, we will delve into what an outside bar is, how it is formed, and its significance in forex trading.
What is an Outside Bar?
An outside bar is a candlestick pattern that occurs when the high and low of a candlestick exceed the high and low of the previous candlestick. In simple terms, an outside bar is formed when the current candlestick’s high is higher than the previous candlestick’s high and the current candlestick’s low is lower than the previous candlestick’s low.
The outside bar pattern is also known as the engulfing pattern because the current candlestick engulfs the previous candlestick. The pattern can be bullish or bearish, depending on the direction of the market.
How is an Outside Bar Formed?
To better understand how an outside bar is formed, it is essential to understand candlestick charts. A candlestick chart is a type of financial chart used to represent the price movements of an asset. Each candlestick represents a single trading session, and the chart is made up of multiple candlesticks.
An outside bar is formed when the current candlestick’s range exceeds the previous candlestick’s range. The range of a candlestick is the difference between its high and low prices. If the current candlestick’s high is higher than the previous candlestick’s high, and its low is lower than the previous candlestick’s low, then an outside bar is formed.
An outside bar can be bullish or bearish, depending on the direction of the market. If the current candlestick’s close is higher than its open, it is a bullish outside bar. If the current candlestick’s close is lower than its open, it is a bearish outside bar.
Significance of Outside Bars in Forex Trading
Outside bars are significant in forex trading because they can signal a potential reversal in the market. A bullish outside bar can indicate that the market is about to turn bullish, while a bearish outside bar can indicate that the market is about to turn bearish.
Traders can use outside bars to identify potential entry and exit points in the market. If a bullish outside bar forms after a downtrend, it could be a signal for traders to enter a long position. On the other hand, if a bearish outside bar forms after an uptrend, it could be a signal for traders to exit a long position or enter a short position.
Outside bars can also be used in conjunction with other technical indicators to confirm a potential reversal in the market. For example, if a bullish outside bar forms at a key support level, and the Relative Strength Index (RSI) indicates oversold conditions, it could be a strong signal for traders to enter a long position.
Conclusion
In conclusion, an outside bar is a candlestick pattern that can signal a potential reversal in the market. It is formed when the high and low of a candlestick exceed the high and low of the previous candlestick. Traders can use outside bars to identify potential entry and exit points in the market and can be used in conjunction with other technical indicators to confirm a potential reversal. Understanding the significance of outside bars in forex trading can help traders make informed trading decisions and improve their overall trading performance.
