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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 time-frames 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.
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).
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.
Try to be more judicious
in the manner in which play outside bars, and attempt to focus
solely on outside bars that agree with assessment of the trend. Identified the mannerism in which grade trend via price action in which 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 – wait for an outside bar that agrees with the
direction in which want to trade that pair, and that is when will
enter.
Outside vertical bars function as ‘triggers,’
to initiate trades in the direction of the longer-term, extended trends
that can find in markets.
