The Inside Bar Trading Strategy Guide

A smaller Inside Bar, ideally forming within the upper or lower half of the Mother Bar, enhances the accuracy of signals. This nuanced analysis empowers traders to distinguish between substantial market movements and mere fluctuations. Shorter time frames tend to produce inaccurate signals due to market noise, causing the pattern to appear multiple times without providing reliable market indications. Conversely, longer time frames might be too extended, reducing the effectiveness of the Inside Bar pattern in signalling ideal market continuation how to trade inside bar or reversals.

On the other hand, an outside bar, or engulfing pattern, happens when the high and low of a candlestick completely engulf the previous candle, signalling a potential reversal. A bearish engulfing indicates a bearish reversal, while a bullish engulfing suggests a bullish reversal. Both are widely used by traders for technical analysis and identifying potential trading opportunities. Finally, one of the ideal trade scenarios occurs when the pattern appears after a decisive breakout from established key levels. In this trading strategy, we are essentially looking for a defined range, as in #3, while also watching for potential price breakouts—when the price breaks or closes beyond the previous key level. To enhance our price action analysis, we strongly suggest integrating volume to identify valid breakouts.

In conclusion, mastering the intricacies of the inside bar pattern provides traders with a robust framework for decision-making. By recognising the signals and patterns embedded in this formation, traders can decipher market sentiments, anticipate movements, and strategically position themselves for success. The inside bar pattern stands as a versatile tool in the trader’s arsenal, offering a nuanced perspective on market dynamics. An inside bar in trading is a candlestick pattern that forms within the high and low range of the preceding bar, indicating a temporary market consolidation.

How to enter a trade with the Inside Bar

A bearish mother candle is part of a downtrend, while a bullish inner bar candle represents a slight consolidation. By the time you finish reading this article, you’ll have a firm grasp on how to identify favorable trading setups on the inside bar and benefit from them. The first option is to place our stop loss just below the mother bar low.

Generally, it is more reliable in range-bound markets with clear support and resistance levels and good volume or in trending markets with strong volume. However, incorporating volume significantly increases its reliability as a candlestick pattern. First, unlike other candlestick patterns that have specific use cases and are only applicable to certain market conditions, the inside bar setup offers a more versatile use case in trading. It can help determine whether a trend will continue, shift to a non-trending market condition, or reverse altogether. Additionally, it can identify specific shifts in market sentiment depending on its position on the chart and the relative size of the two bars. This versatility is particularly beneficial for experienced traders who can effectively utilize the pattern and incorporate other technical analysis tools into their trading system.

As shown in the image to the right, the engulfing candle is more appropriately referred to as the “mother bar”. This is mainly down to what the inside bars represent in the market. This suggests the pressure between buyers and sellers is becoming more evenly balanced. See our Terms of Service and Customer Contract and Market Data Disclaimers for additional disclaimers. Always do your own careful due diligence and research before making any trading decisions. Market participants seem to be questioning if the current price fully reflects the recent positive news.

Price Action Trading Video Tutorials

You can take advantage of this setup, just place a sell stop order above the high. And if the price trades lower, chances are you will see that their stops will get triggered along the way. You can trade it in a similar way, a Sell Stop below the low of the larger candle, and stop loss above the high. You can look to place a sell stop on it and eventually, price traded lower. I look to sell below the low, and stop loss above the high of the inside bar. If I want to go short, my sell stop will be below the low of the larger bar.

An inside bar breakout happens when the price goes past the high or low of the inside bar. Traders should look for more volume and speed as signs of a breakout. In short, the inside bar strategy is very useful for both new and seasoned traders. It shows how important it is to understand and apply trading principles well.

1. This sideways price action represents consolidation, which is what you want to avoid when evaluating an inside bar setup.
2. Investing in Stocks, Commodities & Currencies may not be right for everyone.
3. An inside bar formed during uncertainty or a flat market might not give a clear signal for future price direction.
4. As the inside bar breaks to the upside (price breaks the high of the inside bar) we have price finding support at the level which should really not be a surprise at all.
5. The size relationship between the Inside Bar and the Mother Bar is a critical factor in determining the accuracy of signals.

Best Trading Journals of 2024: Which One Should You Choose?

1 — a strong buying effort is noticeable at the breakout of the 18,600 level, shown by a bright green cluster. After breaking through this level, the price increases sharply, which is reflected in the narrow profile. However, the momentum starts to slow down after surpassing 18,630, as indicated by a bulge in the profile around 18,636 (2).

1. Ideally, your stop loss should be at the other end of the mother candle.
2. This is true whether we’re trading an inside bar, pin bar or wedge breakout.
3. The adaptability of inside bars makes them a valuable tool for traders seeking to thrive in ever-changing financial landscapes.
4. If an inside bar formed inside two higher closes, then it is considered to be a three-bar inside bar positive reversal.
5. These bars are completely contained within the high and low of the previous bar.

Waiting for the breakout candle to close gives a trader more certainty that the price movement beyond the inside bar is strong and likely to continue. The risk here is that the trader might enter the position after a significant part of the move has already occurred. A favorable risk to reward ratio is needed for any setup taken here at Daily Price Action. This is true whether we’re trading an inside bar, pin bar or wedge breakout. Each and every strategy needs to be accompanied by a favorable risk to reward ratio.

Identifying the inside bar is not rocket science, and once you have a basic understanding of what it looks like, you will be able to locate it instantly on price charts. You just need to remember a few rules to identify the pattern correctly. Moreover, the pattern could be either a trend reversal or continuation chart pattern, depending on the context of the markets. It is also one of the most frequently seen patterns that appear regularly in any market condition. So, as you can assume, there’s no one version of the inside bar pattern. It enables you to test trading inside bars and other patterns with footprint charts and/or other indicators, all without risking real money.

Forex trading is a dynamic platform for using inside bar strategies. Knowing how to spot trends and make the best entry and exit points is key. Using the inside bar in a trading plan needs careful analysis and knowing the market well.

Trading Inside Bar Reversals

Our testing revealed that wide range inside bars (with range more than 75% of the range of the preceding bars) outperformed our benchmark by the largest margin. These are bars that barely make it as inside bars and represent only a slight contraction. To determine if a bar is directional, we looked at the open-to-close spread as a fraction of the entire range of the inside bar (high-to-low spread). On the other hand, if the open-to-close spread is wide, it means that the inside bar is relatively directional. High volume bars outperform the benchmark slightly while low volume inside bars clearly under-performed. In essence, the high and low of the third candle is contained within the high and low range of the second candle while the second candle’s range is contained within the first candle’s range.

So if your take profit is 200 pips, your stop loss can be no more than 100 pips away from your entry price. If the previous candle was a higher low and high, I am looking for a bearish trade and will place a sell-stop order below the low of the Inside Bar. If the previous candle were a lower high and low, I would place a buy-stop order above the Inside Bar. Using a previous support or resistance level as a stop-loss will result in a larger stop loss. But it also means there is less likelihood of being stopped out too early in the trade, i.e., it can give the trade more breathing room.