The Outside Reversal Setup

The outside reversal setup takes advantage of a basic market tendency that calls for a test of price levels beyond current value before a reversal can occur.

For a bullish outside reversal condition to exist, the current bar's low must be lower than the prior bar's low, and the current bar's close must be higher than the prior bar's high.

For a bearish outside reversal setup to exist, the current bar high must be greater than the prior bar's high, and the current bar's close must be lower than the prior bar's low.

PATTERN SUMMARY

The engulfing bar of a bullish outside reversal setup has alow a that is below the prior babar'sow and a close that is above the prior bbar'shigh

The engulfing bar of a bearish outside reversal setup has a height above the prior bar high and a close below the prior Bar low.

The engulfing bar is usually 5 to 25 percent larger than the average bar in the lookback period.

PATTERN PSYCHOLOGY

This pattern forms when market participants are testing the waters above resistance or below support to ensure there is no new business to be done at these levels. When no initiative buyers or sellers participate in range extension, responsive participants have all the information they need to reverse price back toward a new area of perceived value.

Also, the two-bar pattern reduces into the wick reversal set upon higher TF; in many cases, the physiology of the outside reversal pattern demonstrates the inherent psychological traits of the wick reversal pattern.