I’ve been trying to find out the difference between engulfing bar and outside bar pattern. This is what I understood. Since both of these are made from 2 bars, for easiness, I’ll refer to first bar as bar1 and second bar as bar2.
In an engulfing pattern, bar2’s candle body has to engulf the body of bar1 and wicks are ignored. In an outside bar pattern, bar2’s entire body including the wicks should be bigger than bar1’s entire body and the wicks.
Engulfing (not outside):
Outside (not engulfing):
Is my understanding correct?
What if it is both engulfing and outside? Does that make the pattern stronger? For example:
Outside bars and engulfing bars are the same thing. Its when the high and low of the bar to the right completely engulfs the high and low of the bar to the left.
Now you will see 2 variations of the engulfing bar, one is where it is considered an engulfing bar if just the body of the right candle engulfs the body of the other, and the second variation is when the entire candle including the wicks are engulfed.
You generally see variation #1 used with stock markets because to engulf just the bodies there needs to be some form of gapping. You generally see variation #2 used with 24 hour markets since you rarely get a gap.
In your first picture that would be variation #1 since the bar gaps up and then closes lower so there is a full body engulfing. Your second picture is variation #2 where the shadows engulf. They are both engulfing bars a.k.a. outside bars.
I think it is important to think about what these groupings are actually telling you about price movements rather than just the strict definition of the pattern itself. This is especially true on a higher time frame.
In your examples:
This needs to be considered in the context of what occured before the first bar. If the movement is in an overall downtrend then the first bar is really just a typical “breather” before the continuation in bar 2. But if the overall movement has previously been an uptrend then bar 1 is showing signs of fatigue with the higher spike but weak close - followed by a strong down move in bar 2, which also failed to exceed the high in bar 1.
This second bar is similar to a doji and, on its own, only shows a period of rest or indecision. On a short time frame this grouping is meaningless but within a strong trend could be a sign of exhaustion and a possible reversal or retracement about to happen (but needing more confirmation before trading it).
Again, this should be considered in the context of the preceding movements. In a downtrend this would be a strong sign of a contrarian move starting, having first formed a marginally lower low in bar 2 but then met with some strong buying throughout the time of bar 2 and finishing both strongly and above the open of bar 1.
But in an existing uptrend, bar 1 would just be a flat day followed by a strong continuation move during bar 2.
All patterns only work sometimes, haha. But this is one of the highest probability patterns if you are measuring their success rate by that metric. Next to pin bars, engulfing bars (variation #2) are my favorite signals. As you mentioned, no pattern should be traded blindly, but they become powerful signals when formed with a trend from a critical suppport/resistance level.