You have watched a ton of YouTube videos, read what seems like a million blog posts, and learned countless trading strategies.
That's great, but now what?
This is where many traders get tripped up.
They learn a plethora of different trading systems, then they try each one out for a few days. Of course, they can't seem to get one to work, so they give up and move on to the next one.
Big mistake.
You just bought yourself a ticket on the Trading Silodrome.
That's when you go around in circles for years, jumping from system to system and never really getting anywhere.
Learning to trade a technical trading strategy successfully, is a 7-step process:
- Create a trading plan
- Backtest it
- Work on your trading psychology
- Forward Test it in demo
- Work on your trading psychology more
- Trade in your live account with confidence
- Work on your trading psychology even more
Anyone who tells you that you can just grab the PDF in #1 and jump straight to #6 is either just trying to sell a course, or they forgot what it is like to actually go through the entire process.
If you really want to make it in trading, then you need to follow those steps.
But it's easy to write a blog post or make a YouTube video about the steps. There is plenty of advice out there on the internets.
How about actually going through the entire process?
Yes, let's do more of that.
In this blog post, I'll give you the exact parameters of a trading system, then in later blog posts, I'll show you the testing results.
Feel free to follow along at home 🙂
Trending Outside Bar Trading Strategy – Version 1 (Codename: Aardvark)
Alright, first we need to define a few things for this Outside Bar trading strategy. It is based on the Big Shadow strategy that I learned from Walter.
To make a custom plan of your own, you can download this worksheet.
The Tools
In this test I'm going to use the following:
- Forex Tester
- The TH Outside Bar indicator for Forex Tester (optional, but speeds up backtesting)
- The 10 and 20 EMA (optional, but it makes it easier to see the strength of a trend)
- Candlestick chart
The Strategy Parameters
- 1% risk on each trade
- 1R profit target
- Daily chart only
Definition of an Outside Bar
The generic definition of an Outside Bar is a bar (or candle) where the high and the low of the current candle is both higher and lower than the high and low of the previous candle.
Here's an example:
But it could also look like this…
This is the preferred type of candle, at least for this strategy. In this trading strategy, we are going to look for Outside Bars that have the following characteristics:
- The candle closes near the top for a long, near the bottom for a short.
- The two previous candles (marked as 1 and 2 above) have lower highs for a short and higher lows for a long.
- Candle 1 should have a lower high than candle 2, for a short. Candle 1 should have a higher low than candle 2 for a long.
- The body of the Outside Bar should engulf the body of the previous bar.
Here's and example of a long Outside Bar:
There is going to be some skill and practice necessary, when it comes to identifying a good Outside Bar, so don't feel bad if you aren't good at identifying them right now. Your goal at this point should just be to get through one round of backtesting on one currency pair, on the daily chart.
How to Determine a Trending Market
In this strategy, we are going to only look for Outside Bars in trending markets. This is where the EMAs help.
They are totally optional, but when there is good separation between the EMAs, that is a good sign that you are in a trending market.
Again, it will take some practice to learn what a strongly trending market looks like, but the EMAs give us a good reference point.
It also helps to learn how to read price action. This course and this course are excellent for that.
Here's what good separation with an Outside Bar, in a trending market, would look like.
Entry
Enter on a pending order, when the price of the next candle breaks the high of the Outside Bar (plus 5 pips) for a long, or the low of the Outside Bar (plus 5 pips), for a short. There also needs to be a support zone for a long and and resistance zone for a short. Outside Bars in between zones will not be considered.
Stop Loss
SL goes on the other side of the Outside Bar, plus 5 pips.
Profit Target
Equal to the stop loss, plus 5 pips. Only looking for a 1R target in this version of the strategy.
Exit
I will only exit when the stop or take profit are hit. No closing out early.
Example
Here's the same chart, with all of the levels shown.
Pairs to Test This On
I will test as many pairs as I can get data for. Stay tuned to future blog posts for the results of the Aardvark.
If you want to see an Outside Bar chart analysis on the EURUSD weekly chart while you wait, read this.
Conclusion
Remember, backtesting does have limitations. But it is the key first step in determining if a trading system could be viable or not. If you have zero data about a system, you are flying blind.
Also keep in mind that your backtesting results may be very different from mine. That is because people see the markets differently and can interpret the same set of rules in very different ways.
That is why it is so important for you to backtest a strategy for yourself and not listen to anyone on the internet!
I will post the results from this Outside Bar trading system soon.
To learn all 7 steps in the Forex Trading Strategy Development process, sign up for our FTSD program.
If you have any questions, leave them in the comments below…
Disclaimer: Some links on this page are affiliate links. We do make a commission if you purchase through these links, but it does not cost you anything extra and we only promote products and services that we personally use and wholeheartedly believe in. A portion of the proceeds are donated to my charity partners.
Outside bars, 10 and 20 EMA and many other price action set ups, patterns etc. tend to be very effective if we add context and structure. The key here is to define what context and structure means and avoid the narrow and over simplification of their definitions by excluding the numerous variables that shape their meanings. No trading system can be profitable without a database system that compiles thousands of samples contemplating multiple scenarios. To make assumptions based on past performance or what we often observe to the left of the chart is often a flawed approach. I believe the most critical question in trading when considering a trade is to include a written statement for the trade in consideration making an argument that explains the best we can why some are willing to buy or sell at any given time. Having said that I am beginning to identify with those who believe that a linear-binary approach to trading meaning defining a single entry-stop loss and take profit approach may not be enough to sustain a profitable system in the long run. We need to incorporate hedging techniques such as what we do in the Option market trading volatility and using the the stock of that option to protect the trade. The key here is when to choose which approach and how much should represent in our trading system. Thanks for your video.?
Hi Carlos,
Yes, every trader has to choose a method that works best for them. Thanks for your input.
Success is focusing the full power of all you are on what you have a burning desire to achieve. Successful Forex traders have rock solid discipline. They plan every one of their trades, and then they simply trade their plans.
Howdy Hugh,
I was just listening/Watching to Walter’s interview with Colin Jessup, and he stated that at least for his requirement the body itself has to engulf the previous body along with the shadows engulfing the entire previous candle. Is that not required based on your approach(based on your examples)? Thanks!
Ignore my previous comment. Reading too fast. Just now seeing the answer in your article after reading again. :-O
Cool, no problem.
Outside bar printed on a lot of GBP pairs yesterday.
Thinking about taking any? 🙂
They didn’t look like legit Outside Bar signals.
Hi Hugh,
In your testing, about how much trades do you think this system offers per month?
I realize it would depend on how much currency pairs one is watching but can you provide numbers for a few pairs?
Thanks and good luck!
Hi Jason,
Good question, I’ll address that in the next post. Keep an eye out for it 🙂