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The Outside Vertical Bar and How to Trade Them

By James Stanley

Few Candlestick patterns can excite traders as much as the Engulfing pattern, or also known as the ‘Outside Vertical Bar.’

This is a one-bar formation that can pop up on any time-frame chart; with the longer timeframes often increasing the potential reliability of the signal.

With the Outside Vertical Bar, what we are looking for is fairly simple: We want the candle in question to completely cover the range of the previously printed candle; taking out the previous high and low.

The chart below illustrates a Bearish Outside Vertical Bar, also known as the Bearish Engulfing Pattern.

Outside_Vertical_Bars_body_Picture_2.png, Outside Vertical Bars and How to Trade Them

Created with Trading Station/Marketscope

As you can see, the Outside Vertical bar takes out the high, and then the low of the previous bar. Many traders will look at Outside Vertical Bars as continuation patterns – trading in the direction of the Outside candle. So in the above chart, traders could be looking to go short upon the close of the Outside Vertical Bar; in an effort to reap the extension of momentum that was very visible in the previous candle.

The Bullish Outside Vertical Bar is similar to the Bearish version, with the exception that the Bullish Candle closes at a level higher than it opened. The chart below illustrates a Bullish Outside Vertical Bar (Bullish Engulfing Pattern).

Outside_Vertical_Bars_body_Picture_1.png, Outside Vertical Bars and How to Trade Them

Created with Trading Station/Marketscope

In the above chart, traders noticing that the Outside bar had encompassed the high and low of the previous candle – looking to go long. As we can see, momentum continued thereafter and this is the goal of the trader trading with Outside Vertical Bars: To capitalize on the momentum that created the engulfing candle.

How to Trade Outside Vertical Bars

Many traders looking for extreme volatility may look to trade outside bars in whichever direction they present themselves. As in, if they receive a Bearish Outside Vertical Bar – they go short. If they receive a Bullish Outside Vertical Bar, they go long.

I try to be more judicious in the manner in which I play outside bars, and I attempt to focus solely on outside bars that agree with my assessment of the trend. I identified the mannerism in which I grade trend via price action in the article “Price Action, an Introduction,” in which I grade the trend with successive higher high’s and higher low’s, or lower low’s and lower high’s.

After identifying the cleanest, strongest trends via price action – I will wait for an outside bar that agrees with the direction in which I want to trade that pair, and that is when I will enter.

Outside vertical bars function as ‘triggers,’ for me to initiate trades in the direction of the longer-term, extended trends that I can find in markets.

--- Written by James B. Stanley

To contact James Stanley, please email Instructor@DailyFX.Com. You can follow James on Twitter @JStanleyFX.

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Additional Resources:

Price Action, an Introduction

Price Action Swings

Price Action Pin Bars

Price Action Breakouts

Support and Resistance – On-Demand Video Course

Money Management module -- On-Demand Trading Course

“What is the Number One Mistake Forex Traders Make?”