Swing Trading With Outside Bar Failure Strategy

In today’s article, let’s join Finance Solutes to explore the Outside Bar Failure strategy in forex trading. This is one of the key strategies that can help you earn profits in the most optimal way.

The market declines and trades lower than the most recent session. The bears cheer while the bulls lament. In the next few seconds, the market rises under surprised eyes and closes above the most recent session. Now, the bears are confused, and the bulls become optimistic.

What just happened will be represented on the daily candlestick chart as an outside bar candlestick.

Outside bars are emotional and erratic. They test the extremes of market psychology, triggering intense emotions from short-term traders. However, if you stay calm before the market takes off, you can exploit the chaos for profit.

You’ll often see bullish traders blindly buying above a bullish outside bar. Likewise, bearish traders may sell below a bearish pin bar without a second thought. These are the traders most likely to fall into the trap set by this swing trading setup.

1. RULES FOR TRADING THE OUTSIDE BAR FAILURE STRATEGY

BUY TRADE	SELL TRADE
The SMA is sloping upwards	The SMA is sloping downwards
The market breaks below the low of a bearish outside bar	The market breaks above the high of a bullish outside bar
Place a buy stop above any bullish candlestick	Place a sell stop below any bearish candlestick
No candle’s high should be lower than the low of the bearish outside bar. If this occurs, the setup is invalid.	No candle’s low should be higher than the high of the bullish outside bar. If this occurs, the setup is invalid.

2. ILLUSTRATIVE EXAMPLE OF OUTSIDE BAR FAILURE

2.1. Winning Trade

The chart above shows the daily candlesticks of EUR/USD. The upward-sloping SMA indicates its trend:

1. The market had been in an uptrend for over a week.
2. This outside bar formed at the end of a prolonged bullish move. It attracted counter-trend traders who were betting on an overextended bullish rally.
3. However, they gained no follow-through. The bearish outside bar immediately failed with a bullish pin bar. Hence, this bullish pin bar offered a great failed-trade opportunity.

The green lines mark a possible target projected by the recent bullish momentum.

2.2. Losing Trade

This is the daily chart of GBP/USD that Finance Solutes wants to highlight for you:

• A bearish gap below the SMA confirms the market’s downtrend.
• This bullish outside bar attracted attention as a failed trade setup. However, its unusually wide range did not bode well for a swift bearish continuation.
• The breakout above the outside bar immediately met resistance. As a result, a bearish reversal candlestick led us into a sell trade.

3. SUMMARY

Setups in the Outside Bar Failure strategy must meet the following characteristics:

– The outside bar is also a trend bar that closes above the SMA. (Most high-quality Outside Bar Failure setups are cases of the Trend Bar Failure pattern.)

– The outside bar has a relatively small range within the context of the trend.

Take a look at the examples:
The outside bar in the winning example hardly reversed the prior bullish momentum. In contrast, in the losing example, the outside bar nearly engulfed the tug-of-war that had lasted for two weeks.

Both outside bars looked strong when viewed in isolation. However, the context of price action revealed which one was more likely to fail.

In this section, we looked at an Outside Bar Failure pattern within a trending market. In practice, this pattern is highly versatile and can also be traded in range-bound markets. Outside bars trap breakout traders, offering excellent breakout failure trade opportunities.

For this trade, the opposing barrier of the outside bar is a safe target. For more ambitious targets, aim for the nearest trend formation point or above the next support and resistance levels.