Bullish and Bearish Outside Bars

• Posted by kenpachi on January 25, 2009
• 0 comments

I came across these two patterns on the james16 thread on Forex Factory. They are both described as continuation patterns of the prior trend. I did a bit of back checking and they don't seem to turn up as much as pin bars. This does not mean they are more reliable than other patterns, it just means they don't show up as much from my observations.

How to identify Bullish and Bearish Outside Bars

This is the tricky part. As I was going through the thread I came across various conflicting definitions for these patterns which made it confusing, but I was able to pick out this one. Currently I wouldn't put much faith in these patterns and would stick to the candlestick patterns like bearish and bullish engulfing, but it is always nice to know how others think. The pattern (the version I chose) is a simple pattern consisting of two bars with the following characteristics:

Bullish Outside Bar aka BUOB

1. The second bar engulfs the first bars High/Low range
2. The second bars "Open" must be below "Close" of first bar (first bar can be bull or bear)

Bearish Outside Bar aka BEOB

1. The second bar engulfs the first bars High/Low range
2. The second bars "Open" must be above "Close" of first bar (first bar can be bull or bear)
3. *** The second bar close is below first bar close (adding this rule matches with another version), so maybe it's a better setup.

If valid these patterns usually represent a continuation of the prior trend, though that is not always the case.

Picking the best BUOB and BEOB setups

Like with any pattern make sure other indicators support the pattern such as multiple levels of support and resistance, trend lines, and other indicators you use. That aside there are some characteristics that make for better BUOBS and BEOBS. Here are a few

• Open and Close Price are far apart on the second bar
• On BUOB the longer the bottom shadow/wick the stronger the upward move
• On BEOB the longer the top shadow/wick the stronger the downward move
• The second bars open/close range (body of a candlestick) should be a lot larger than the range of the first bars open/close range

How to trade BUOB's and BEOBs

Just like any pattern there are many ways you can trade them, it just depends on your risk tolerance and how many trades you want to get in. Below are a few ways you could go about trading them.

Trading the Breakout

This is a common technique which can get you into successful setups. The idea is to place a pending buy stop order just above the high of BUOB and a stop loss just below it. For a BEOB place a sell stop order just below the low of the BEOB and a stop loss just above the high of the BEOB.

Advantages
If your order is triggered it has a good chance of going in the direction you hoped. You won't miss out on any big moves, that doesn't mean you can't get stopped out by some crazzy price swings, so keep that in mind.

Disadvantages
The main disadvantage is your stop loss is going to be pretty big compared to other methods. You risk is essentially the range of the bar which can be quite a lot in some cases.

Enter on the retracement of BUOB/BEOB bar

This is my preferred technique for most patterns. You set a pending order to buy or sell on the 61.8% or 78.6% retrace of the BUOB or BEOB bar with a stop just below the low or high depending on the pattern.

Advantages
Depending on which retracement level you get into, you can get in at a very good price thus lowering your risk.

Disadvantages
By waiting for the retracement you might miss some of the big moves that don't retrace much. You also have a higher chance of getting into more failed setups than if you went with the breakout strategy.

Buying on the close of the BUOB/BEOB bar

You place your order once the BUOB or BEOB bar closes. In a BUOB you place your stop just below the low on the BUOB bar. In a BEOB setup you place your stop just above the high of the BEOB bar

Advantages
You get to make a lot of trades

Disadvantages
You are probably going to have a lot of losing trades and losing a lot on each trade.

Candlestick Version

These two patterns are very similar to the bearish and bullish engulfing candlestick patterns. The major difference is that the second bar must engulf the High/Low range of the first, whereas the candlestick version just focuses on the body engulfing.

In addition, I find it is easier to find these patterns using a candlestick chart, since I pay more attention to the gap between open and close price and the relation of these gaps i.e body of candles, whereas OHLC Bar charts do a better job highlighting the high and lows of a chart.

Examples of BUOBS and BEOBS