Outside Day (Bar) Trading Strategy — Rules, Settings, Performance, and Backtest Insights

An outside bar strategy is a method of trading that uses the outside bar price pattern to find trade setups. Although very popular among price action traders, the strategy can be subjective because outside bars are challenging to interpret since they heavily rely on the context in which they take place. Whatever strategy you create with the pattern has to be backtested to be sure it works.

The outside bar pattern has different configurations, depending on whether the first bar is up or down and whether the second bar is up or down. These are the four configurations:

The first and second bars are up
The second bar is up; the first bar is down
The second bar is down; the first bar is up
The first and second bars are down

We backtest to find out the performance after an outside day. The chart below shows SPY’s (S&P 500) performance from the open to the close after an outside day.

The average gain is zero and thus below any random day, which is about 0.04%. We backtested plenty other ETFs, and the price action after an outside bar seems pretty random.

You can find more info about this trading strategy here:
https://www.quantifiedstrategies.com/outside-day-trading-strategy/