As the name suggests, this stitch is used to mark outlines in an embroidery pattern. It is a flexible stitch that can follow easy curves. In looks and procedure, it is only subtly, but importantly different from the stem stitch. Please follow the instructions of both the stitches carefully to study the differences.

To make the logic clearer, I have drawn a temporary stitch line with a pencil. Now, note that all the stitch points in outline stitch will fall ON the stitch line. I will be working this stitch from left to right. This instruction is for right handed learners.

outline stitch 1         outline stitch 2
Fig 1: Bring out the thread through A and take it in through B. Take the needle backwards and bring the thread out through C. Make sure the point C lies under the stitch A-B.    Fig 2: You need to note that the point C lies about half way through A and B. Also note that C lies under the stitch A-B. 
     
outline stitch 3
Fig 3: Take the needle in through D. Try to mark D in such a way that the point B will lie half way through C-D. Bring the needle out through B. The stitch point B will be at the bottom of the previous stitch.
     
outline stitch 4
Fig 4: Continue this pattern of stitching with the needle coming out from the bottom the previous stitch always.
 
outline stitch 5
Fig 5: The reverse of the fabric will give you a back stitch pattern.

NOTE:
So, the unique feature of outline stitch is that, when you work from left to right, the needle and thread will be brought out from the BOTTOM of each previous stitch. In case you work from top to bottom, the needle and thread will come out through the LEFT side of each previous stitch.
If we follow a pattern where the stitch comes out through the top or right side of the previous stich, it becomes a STEM STITCH pattern. Keep this in mind, and you will have the logic! ;)
The subtle visible difference between both stitches is that in a stem stitch, the separation between the stitches are more visible than what you would see between the stitches in an outline stitch. 

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