Outside and Inside Bars
Outside and inside bars are candlestick patterns that usually consist of two candles and less often several candles. Both patterns are reversal formations.Contents:
Let’s take a closer look at what they consist of and how these candlestick formations appear on the chart.
Outside Bar
The outside bar (engulfing) formation is used in both candlestick analysis and price action trading. Typically, this pattern consists of two candles, with the second candle completely engulfing the first.
While definitions of the engulfing setup may vary across sources, I follow the rule that the body of the first, smaller candle must be fully covered by the body of the second, larger candle, and the wicks of the first candle should not extend beyond those of the second.
Inside Bar
The inside bar pattern typically consists of two candles: a larger first candle and a smaller second candle that is fully contained within the range of the first.
For this pattern, the following conditions should be met: the body of the second candle must be smaller than that of the first, and its wicks should not extend beyond the wicks of the first candle. Ideally, the second candle, including its wicks, remains entirely within the range of the first candle’s body.
How to Trade the Engulfing and Inside Bar Patterns
In my opinion, the inside bar is not a particularly strong pattern. When examining this setup from a higher timeframe down to a lower one, it becomes clear that the inside bar is simply a narrowing of the price range, and the direction of the breakout is generally unpredictable. Although most sources describe it as a reversal pattern, it is usually better to wait for the price to break out of the inside bar before making a trading decision.The outside bar (engulfing) is a considerably stronger reversal formation. However, it should not be traded just anywhere. For trading, it is best to focus on key areas such as levels, the ends of corrections in the direction of the main trend, channel boundaries, and other significant zones.
Outside Bar at the Level
When the outside bar forms at the key level, open a trade.
Outside Bar in the Correction
Once the outside bar appears at the expected end of the correction, enter a trade.
Engulfing at the Channel Boundary
Once the engulfing pattern forms at the channel boundary, enter a trade.
To summarize
The main thing to understand is that the engulfing pattern is not a standalone trading system, but it can be a useful addition to your strategy.
- ✅ Pin Bar, Hammer, Shooting Star
- 🌐 Railroad Tracks and Tweezer
- 📜 Support and Resistance Levels
- 💱 Trend Lines
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