Outsidereversal

Technical analysts study price charts to look for patterns that suggest what might happen next. Each bar on a chart shows the high, low, open and close for a period, such as a day.

An outside bar is one whose range is wider than the previous bar, so it "engulfs" it, with a higher high and a lower low. An outside reversal adds a condition about the close.

In a rising market, a bearish outside reversal makes a new high and then falls to close below the previous bar's low, suggesting buyers have lost control. In a falling market, a bullish version makes a new low but closes above the previous high.

Traders like the pattern because it shows a sharp change in sentiment within one period. The market pushed to a new extreme, attracted late buyers or sellers, and then reversed against them.

The wider the bar and the heavier the trading volume, the more weight many traders give to the signal. It should be used with care.

The pattern happens often and many signals fail, especially in choppy markets with no clear trend. Traders therefore combine it with other tools, such as trend lines, volume and support levels, and set a stop-loss, an order that limits the loss if the trade goes wrong.

For non-specialists, the term is useful for understanding conversations about charts and market commentary. It does not say anything about a company's fundamentals, such as profit or debt.

It only describes how the price behaved, and price behaviour can be misleading over the short term. Volume adds useful context.

A reversal on volume well above the recent average suggests many participants were involved and were forced to change their minds. A reversal on thin volume might reflect only a few trades and is easier to dismiss.