Today we conclude our series on price action trading strategies by”Trading the Inside Bar With Gusto. To refresh our memories, Monday, we looked at “ How To Trade The Pin bar”, Yesterday, we touched on “How To Trade The Fakey Pattern.” So onward to the Inside Bar.
The Inside Bar Forex Trading strategy is a high probability strategy with a good risk reward ratio. Unlike other price action set ups, the inside bar strategy requires fewer stop losses. You’d be better off trading inside bars during the daily chart time frames and preferably in strong trending markets especially when breakouts influence the direction of the trend. I guess the first question we should be asking is:
What is an Inside Bar?
Well an Inside Bar is a bar that is nicely tucked within the range of the preceding bar, popularly known as the mother bar. The inside bar typically has a higher low(HL) and a lower high(LH) than the mother bar. On some smaller time frames, the inside bar is shaped like a triangle.
As the anatomy suggests, the inside bar is nicely sandwiched within the high and the low of the mother bar. It is also possible to have multiple inside bars within the range of a mother bar. Such a scenario suggests a possible breakout.
What Does an Inside Bar Suggest?
An inside bar suggests a period of consolidation. Inside bars take shape as a market consolidates after a strong market offensive. They occur at crucial pressure points such as major support/decision levels. The inside bar also provides a low risk opportunity to enter a trade or a safer exit point. Like I hinted earlier, the inside bar acts both as a continuation signal and a turning point signal. For beginning traders out there, inside bars would be a lot easier to deal with. However, reversal signals can be very tricky to deal with. So you’d be better off leaving them alone until you have bagged enough experience dealing with continuation signals.
How Do I Trade The Inside Bar?
Now how do I trade the inside bar? Well, you can trade inside bar two ways. You can trade the inside bar as a continuation signal or a reversal signal.
As you can see from the graphic, the inside bars act as both reverse and continuation signals. We see an inside bar forming at a support level, and then the market breaking in the opposite direction. The market then moves higher from the inside bar pattern that formed at the previous level of support
Where Do I Place Stop Losses?
Now some of you are probably wondering “Where do I place stop losses?” The most common stop placement of choice is just below the mother bar high or low depending on whether you are going long or short. There is not point trying to figure out the best distance. Either, the trade works or it doesn’t.
Below is an illustration of the stop placement
The next typical stop placement is on inside bars with large mother bars You may want to place your stop loss at the 50% level-that is halfway between high and low of the mother bar. If you want to achieve a solid risk reward ratio, the 5o% level is the way to go. The illustration below says it all.
Trading Inside Bars as Continuation Signals
You can also trade inside bars as continuation signals. The most appropriate time to trade an inside bar is when the market is trending strongly or the market is moving in the opposite direction or it decides to take a break. Inside bars came in handy on the daily or 4 hr chats. But you’d be better off sticking to the daily charts until you have perfected the inside bar setup in this time frame.
The above graphic illustrates inside bar setups on the back of a strong upward trend. This resulted in a clean breakout. When you see such a scenario, it’s time to buy..
Trading Inside Bars as Reverse Signals
It’s also possible to trade reverse signals. But please make sure you’ve perfected the continuation signal pattern before jumping into reverse signals. Reversal signals can play tricks with your trades. Besides it will not be in your best interest to jump straight into the lion’s den.
As you can see from the graphic here, the inside bar setup on the left reveals a period of consolidation and indecision on the market’s side. A downward slide ensues as price breaks down past the inside bar’s mother bar. In such a scenario, it’s time to sell.
That’s a wrap for “Trading the Inside Bar With Gusto” Like I said, you don’t need that many stop losses to trade the inside bar. But you do need the inside bar during the daily time frame. Any other time frame and you’ll be causing your account some serious pain.
Til next time take care.
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