HOLLOW POINT TRADING
What is an Outside Reversal?
An outside reversal (also called an engulfing pattern or outside bar) occurs when a price bar completely engulfs the previous bar's range—meaning it has both a higher high AND a lower low than the prior bar—and closes in the opposite direction of the prior trend.
This pattern shows a dramatic shift in control from one side of the market to the other within a single trading session, making it one of the most powerful reversal signals in technical analysis.
Pattern Requirements
Essential Characteristics
- Current bar's high is HIGHER than the previous bar's high
- Current bar's low is LOWER than the previous bar's low
- Current bar closes in opposite direction of prior trend
- Should occur after an established trend (not in chop)
- Higher volume on the reversal bar adds significance
Bullish Outside Reversal
Formation
Forms at the end of a downtrend. The outside bar makes a new low (below the prior bar's low), then reverses sharply and closes above the prior bar's high. This shows sellers pushed price lower but buyers overwhelmed them completely.
What It Means
Sellers had their chance and failed. Despite making new lows, the bears couldn't hold them. The strong close above the prior bar's high shows buyers stepped in aggressively. Sentiment has shifted from bearish to bullish.
Trading the Pattern
Entry: Buy on break above the outside bar's high, or on next bar's open for aggressive traders.
Stop Loss: Below the outside bar's low.
Target: Prior resistance level or 1:2+ risk-reward ratio.
Bearish Outside Reversal
Formation
Forms at the end of an uptrend. The outside bar makes a new high (above the prior bar's high), then reverses sharply and closes below the prior bar's low. Bulls pushed for new highs but sellers took complete control.
What It Means
Buyers tried to continue the uptrend and failed spectacularly. The rejection from highs and close below the prior bar's low shows aggressive selling. The tide has turned from bullish to bearish.
Trading the Pattern
Entry: Short on break below the outside bar's low, or on next bar's open.
Stop Loss: Above the outside bar's high.
Target: Prior support level or 1:2+ risk-reward ratio.
Increasing Pattern Reliability
Confluence Factors
Outside reversals work best when combined with other technical factors:
- Pattern forms at key support or resistance levels
- Pattern forms at trend line tests
- Pattern occurs after extended move (overextended trend)
- Volume spike on the outside bar
- RSI or other momentum divergence present
- Pattern forms at Fibonacci retracement levels
Warning Signs (Lower Probability)
- Pattern forms in the middle of a range (no clear trend)
- Very low volume on the outside bar
- Outside bar is extremely large (may need consolidation)
- Multiple outside bars in succession (indecision, not reversal)
Timeframe Considerations
Outside reversals are significant on any timeframe, but higher timeframes carry more weight:
Daily/Weekly charts: Most reliable. Used by swing traders and position traders. Can signal major trend changes.
4-hour/1-hour charts: Good for swing trades. Confirm with daily trend direction.
Lower timeframes: More frequent but less reliable. Use for intraday reversals but require tighter risk management.
Key Takeaways
The outside reversal is a powerful pattern because it shows complete rejection of the prior trend within a single bar. The key is context—look for these patterns at the end of established trends, at significant price levels, with volume confirmation. Always manage risk with stops beyond the outside bar's extreme.