In price action, we have chart patterns which take time to build. In candlestick, we have single, double and triple candlestick patterns. These candlestick patterns help traders to identify signals at an early stage in the development of a new trend.
As a general rule, the stronger the preceding trend, the more powerful the effect of the single, double and triple candlestick price patterns.
An outside candle is a candlestick pattern whose trading range totally encompasses that of its predecessor.
These types of patterns have more weightage after both downtrend and uptrend.
When you see an outside candle pattern at the top of an uptrend, it means a reversal. The wider the real body of the outside bar, the stronger the signal of reversal. It indicates that the market is vulnerable to profit taking.
In Japanese candlestick patterns, we have a bullish and bearish engulfing candlestick pattern which works as an outside candle.
The open and close price of the candle is the determining factor to decide how strong the candlestick pattern is.
In the engulfing candlestick pattern, the real body of the second candle engulfs or fully encompasses that of its predecessor.
The comparison is read body to real body. Wicks are completely ignored in this case.
An outside candle pattern at the end of a downtrend is commonly called a bullish engulfing. If it shows after an uptrend, then it’s called bearish engulfing.
Many technical analysts prefer to compare wick to wick and real body in order to get confirmation of reversal.
Dark cloud cover at the top of an uptrend and piercing pattern at the bottom of a downtrend is also considered as a strong reversal candlestick pattern.
An outside candle shows price broke out of the previous trading range of a time period in both directions. This means, the price action of the new candle is outside of the previous candle.
The price action of the outside candle is exactly the opposite of the inside candle.
To qualify to be an outside candle on a daily chart, the current candle of the day should close with a higher high and a lower low in relation to the previous day.
Some traders call an outside candle as an outside bar candlestick pattern as it’s a two candle pattern in which the large candle completely engulf the previous smaller candle on a price chart.
A bullish outside candle goes lower than the previous candle lows and then closes higher than the previous candle highs.
A bearish outside candle goes higher than the previous candle high and then closes lower than the previous candle’s low.
Traders take the outside bullish candle very seriously as a reversal pattern when it shows on a chart in a trend near overbought and at resistance level.
Similarly, if an outside bearish candle shows in a downtrend at the oversold level and at the support zone, then traders take it as a high probability reversal pattern.
Traders prefer to go long on a bullish outside candle with a stop loss just below it. In case of bearish outside candles, they go short with a stop loss above it. Many traders prefer to use other technical indicators as a confirmation before entering into the trade.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
