Outside Bar Reversal

Entry Logic

• Enter long on a bullish outside bar, where the bar's range completely engulfs the previous bar's range.
• Confirmation is a close in the top 25% of the bar's range.
• Use a daily timeframe for this setup.
• Entry should be above the high of the outside bar.
• This setup works best in a trending market that is consolidating.

Exit Logic

• The profit target is a 1.5:1 risk-reward ratio from the entry.
• Take full profits at the target.
• No trailing stop is used.
• Exit if price closes below the low of the outside bar.
• Exit on a confirmed bearish outside bar.
• Exit if the trade is not profitable within 5 days.
• Exit if the RSI (14) drops below 50.

Stop Loss Structure

• Place a hard stop below the low of the outside bar.
• No soft stop is used.
• Maximum dollar loss is $500 per trade.
• Maximum percent loss is 1% of the account.
• The structural stop is the low of the outside bar.

Risk Management Framework

• Risk 0.75% of the account per trade.
• Daily loss limit is 2.25% of the account.
• Weekly loss limit is 5% of the account.
• Maximum drawdown is 15%.
• Minimum risk-reward ratio is 1.5:1.

Position Sizing Model

• Use a fixed fractional sizing model.
• No volatility adjustment is needed.
• Use 2x size for A+ setups.
• Do not scale into trades.
• Do not scale out.

Trade Filtering

• Avoid trading this setup on very volatile stocks.
• Requires a clear outside bar with a strong close.
• Trade only stocks that are in a clear uptrend.
• Avoid trading this setup during a bear market.
• Do not trade in choppy, sideways markets.

Context Framework

• The weekly chart should show a clear uptrend.
• Price should be consolidating near the 20-day EMA.
• The setup should occur after a period of low volatility.
• The monthly chart should show a bullish bias.

Trade Management Rules

• Do not move the stop to breakeven.
• Take full profits at the target.
• Do not add to winning trades.
• This is a short-term swing trade.

Time Rules

• This setup is identified at the end of the trading day.
• The entry is taken on the following day.
• The trade should last for 1-5 days.

Setup Classification

• A+ setup: Large outside bar, high volume, strong trend alignment, and a close at the high.
• A setup: Clear outside bar, moderate volume, neutral market.
• B setup: Small outside bar, low volume, counter-trend.
• C setup: No clear pattern, avoid.

Market Selection Criteria

• Trade stocks in the S&P 500 with a beta close to 1.
• Minimum daily volume of 1 million shares.
• The stock should have a tendency to trend.

Statistical Edge Metrics

• Expected win rate is 70%.
• Average win is 1.5R.
• Average loss is 1R.
• Profit factor is 1.05.
• Expectancy per trade is 0.05R.

Failure Conditions

• The strategy fails if the high of the outside bar is not breached.
• A common failure is a false breakout followed by a move to new lows.

Psychological Rules

• Be disciplined in taking profits at the target.
• Do not let a winning trade turn into a loser.

Advanced Components

• Use a volatility indicator to identify periods of consolidation.
• A sector analysis can help identify the strongest trending stocks.
• Avoid trading this setup on multiple correlated stocks.
• The weekly chart must confirm the uptrend.

Location

• The setup is strongest when it forms after a shallow pullback in a strong uptrend.
• The setup is weakest in a choppy, sideways market.
• The location of the outside bar in the overall trend is important.