Nonetheless inside bars, if traded correctly, can be a great way to make money from the Forex market. Either by trading them on their own or as a method of scaling into trades which I’ll talk more about later. The first candlestick must be bearish (red or black) and if the second candlestick is completely contained by the first, set a sell stop order at the first candle’s low minus 10% of its range (high minus low). Here we picked a random chart and plucked 14 inside bars that are technically valid – that is, they fall within the range of the candlestick prior to them. This should give an idea how frequently you can expect to encounter inside bars as you start looking for them. An inside bar can be part of an extremely effective price action strategy.
You should only trade in these products if you fully understand the risks involved and can afford to incur losses.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.That’s why trading this pattern can be profitable – you trade in the trend and open a position upon a breakout of the range.The subsequent bullish pin bar makes a false breakout of the inside bar and support level.However, this position would likely hit its stop-loss on the very next candle (3).Contextual analysis can provide valuable clues.If a bullish Inside Bar pattern forms after a significant downtrend, it could suggest a potential bullish reversal.A pin bar is a price action strategy that shows rejection of price and indicates a potential reversal is imminent.
Trading Tools
Once these two conditions are satisfied, traders can find good positions for entries. Before deciding to trade on inside bars, we have to wait for the daily close and observe if the highs and lows of the inside bar are within the range of the first candle. The first candle is often referred to as the “Mother Bar” by traders. While a tighter stop loss can drastically improve the risk to reward ratio for a trade it also makes the trade more likely to be succumbed to volatile market moves, especially in a sideways market. Setting stop losses can also vary between aggressive versus conservative traders. Risk averse traders will usually prefer to place the stop loss beyond the high or low of the candlestick preceding the inside bar – that is, the candlestick that the inside bar is inside of.
Risks of using inside bars
We like to see basing under resistance for an upside breakout and above support for downside breaks. Our double inside bars are short term consolidations and we can expect that when they break, the odds are they will reach the high or low of the mother bar. With practice and the right risk management measures in place, inside bars could prove to be a useful trading strategy. The high probability way of trading inside bars is when they’re used as a continuation signal in an already existing trend. Usually you will see inside bars soon after the market has made large movement in one direction, this is due to two sets of traders taking different courses of action in the market.
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. Inside bars are among the most popular candlestick patterns price action traders use in their analysis and trading.
In the example below, we examine trading an inside bar pattern against the dominant daily chart trend. Here, the price retraced to test a key support level, forming a pin bar reversal at that support, followed by an inside bar reversal. Observe the strong upward movement that followed this inside bar setup.
You can see the relatively smaller range of the inside bars and importantly how their high and low are tucked within the range of the prior bar, giving it the look of being ‘inside’ the preceding bar. If you liked this educational article please consult our Risk Disclosure Notice before starting to trade. Inside bars can be traded in two ways, one way is a high probability setup whereas the other is a low probability setup.
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.Another way to place them would be near the 50% level of the mother bars (middle of the high and low of mother bars).This pattern signifies a consolidation phase where the market takes a “pause,” often leading to a breakout once the price breaks above or below the Inside Bar.The basic strategy is looking for quick price targets, we are not interested in oversold/overbought and we can see momentum in the candlesticks.If the market is not showing any certain trend, the Inside Bar pattern will not be able to form due to the uncertain market movement.
Support and Resistance Levels Trading Strategy
Choppy price action can call for extremely difficult and risky trade management, increasing your problems further. If another inside bar pattern forms, the current position should be closed or the pending buy/sell order must be canceled and entry orders must be updated to the latest candles. The first candlestick must be bullish (green or white) and if the second candlestick is completely contained by the first, set a buy stop order at the first candle’s high plus 10% of its range (high minus low). These typically reflect a period of consolidation within a trend before making another strong move in the same direction, but they can also indicate potential reversals off inflection points.
Inside bars usually have higher lows and lower highs than the previous candles. 2 — this candle shows a bearish breakout of the inside bar, which suggests opening a short position. However, this position would likely hit its stop-loss on the very next candle (3).Contextual analysis can provide valuable clues.
After breaking through this level, the price increases sharply, which is reflected in the narrow profile. However, the inside bar forex momentum starts to slow down after surpassing 18,630, as indicated by a bulge in the profile around 18,636 (2). A test of the breakout from the consolidation zone formed by the double inside bar (5). When volatility is low, inside bars might form without leading to significant price movement, making trading harder. Bright green clusters (1) show bullish activity as the price moves up towards the 53,200 resistance level. On the left side of the 4-hour BTC/USD chart, you can see five inside bars marked with arrows.
What are some tools and indicators used to detect inside bar setups?
Conversely an entry on the break of the high of the inside bar on the second chart would have also made for a profitable trade. One of the ways the market re-groups is through a period of consolidation within a broader trend. Price consolidation occurs in uptrends, when market players who are long start selling for profits. New buyers come in and buy, which maintains the higher price levels. This continues as long as buyers outperform the sellers and drive the market higher.
