08 Feb 2010
Getting the breaks with outside bars

Hello and welcome to Cantos Charts Masterclass. I'm Sandy Jadeja, Chief Market Strategist for CMS FX.

We're going to continue our series of education with Cantos and as always, everything is for simply educational and informational purposes only.

Today we're going to look at an outside bar pattern which is when the high and the low of the current bar is outside of the parameters of the previous bar. If you haven't already looked at the previous lesson I strongly recommend you look at the inside bar technique because both the inside bar and the outside bar work in conjunction in the way that you trade it.

So, an outside bar is simply when we have seen the high of the current bar break above the high of the previous bar and when the low has broken the previous low. So in other words, this bar is much bigger than the previous bar.

In this example here, this is the FTSE 100 weekly and as you can see, over a period of weeks, we only actually had one occurrence of an outside bar. Now this pattern doesn't occur that frequently. The inside bar tends to occur much more frequently than the outside bar, but it is still however a technique that is worth considering.

So in the situation over here we have seen that the market has expanded. In other words, it has broken above the previous bar's high and also taken out the previous bar's low. This is where the bulls and the bears are really struggling to fight it out and to take the market in a specific direction.

So in this example here, the trend has been up and the market has succeeded in continuing the trend towards the upside.

In this example, what I want to explain to you is that when we get an outside bar, what are we looking at? How do we actually trade this? The way I like to look at outside bars is to say, well actually we have a range here. Both the bulls and the bears have been really trying to take this market out, so what is the best way to look at this market and enter with a stop?

We have an outside bar just over here - and this is Microsoft. This is a weekly chart. So we have an outside bar just over here. The high has taken out the previous bar's high and the low has taken out the previous bar's low.

What I've done here is to set a range. The next bar doesn't take out the market's high or low at this stage, but what I have done is set a range there and I'm looking for a break outside of that range.

So in this example, the market continues three weeks later to take the high out. That would initiate a long position with a stop just below the red line. But look what happens over here. Again, we get an outside bar. The following bar doesn't take out the high or the low, so again I set some parameters. That's the high range and that's the low range. Following on three weeks later the market sets another outside bar. Again, I will set the range. Once the market takes out the high I could initiate a second position, or if I haven't already entered the market here, I could initiate a new position and then I'm looking to ride the trend. As long as the market doesn't take out this low then I'm in a nice move towards the upside.

The outside bar technique I favour much more on the longer term charts because it is more like a trend continuation pattern as far as I am concerned.

So here's a very good example where we've seen this in action. As you can see, Microsoft has traded very nicely towards the upside.

In this example here, what I want to show you is combining both the inside bar and the outside bar. What we're seeing here is narrow range inside bars. We actually have an outside bar just taking place over here. The market just slightly takes the high out and then, of course, it stops here by taking the low out. If you had initiated a trade by going short over here, there was a nice trade just along this side here.

Now further along again we see a nice range of very narrow inside bars. Once again, the market has taken the upside out and then of course the market continues towards the upside.

Now markets tend to contract and expand and that's really where you start to see inside bars and outside bars forming. These are very good ways to trade the market if you're looking for breakouts.

So the outside bar tends to occur more frequently within short-term timeframes, but when longer-term timeframes are used, the frequency is much less, but the probability of the trade working in your favour is much higher.

The outside bar pattern is a short-term pattern and should be ideally traded within the current trend and outside bars can also be used as range reference points for breakouts as we have seen in the previous example.

In next week's lesson we're going to take a look at using indicators and there is quite a few of them to learn.

In the meantime, have a great and safe trading week. This is Sandy Jadeja for Cantos Charts Masterclass.