Forex Swing Trading Strategy #6:(Inside Bar Trading Strategy)

Price action trading is where traders use bar or candlestick patterns to analyse any market such as Forex to find trading opportunities. One of the more popular price action trading strategy is using an Inside Bar candlestick pattern.

One reason the inside bar trading strategy is a popular technical analysis technique is it is one of the best ways to indicate a potential breakout and momentum move in the market.

Understanding that the inside bar signifies a “pause” in the movement of the market, you can start to see why this price action strategy ranks as one of the best.

Let’s zero in on what’s behind the inside bar trading pattern, what traders are thinking, and how you can trade them.

 

What Is An Inside Bar

An inside bar is a candlestick pattern that needs at least two candlesticks or bars to form.

What is an inside bar trading strategy

The bar on the left is called the “Mother Bar” and the inside bar forms within the range of the previous candlestick.  The inside bar is fairly easy to see on a chart as you will see bigger bars and then smaller bars.

Note:  On a daily chart, this pattern is usually called an “Inside Day” trading strategy but the trading concepts are the same.

4 quick inside bar facts:

  • Inside bar forms within the trading range (or shadow) of the preceding bar.
  • It is at least a two candlestick formation
  • Mother candlestick can be either bullish(green) or bearish(red)
  • The inside bar can be bullish or bearish

It is not a complicated price pattern and although you will see many of them on your charts, you want to make sure you are using the inside bar trading strategy only in certain locations on your chart.  We will cover that further.

 

What Are Traders Thinking

Price action traders will look at this chart pattern and see that the inside bar represents a pause or consolidation in the market.  These are low volatility ranges and the next course of action is a high volatility market and that equals a swing trading opportunity.

The high and low of the mother bar actually forms a short term support or resistance price and the inside bar shows that, at that point, there is not enough conviction in either direction.

That is why you only want to trade them in certain locations because it is easy to counter-trend trade in the middle of the chart.  You want context!

 

Trading Inside Bars

As with any trading Forex trading strategy, you want to make sure you are using a trading plan and have back tested the strategy you are using.

You have learned that you must trade inside bars with some context that indicates the potential of a turning point or continuation in the market.

The inside bar setup gives you exact places to put your important stop loss as a breakout of an inside bar should be met with momentum if it is a true resolution of the price pattern.

As mentioned, you want to trade inside bars in areas that have the potential to affect price:

  1. Areas of support & resistance levels
  2. Pivot points
  3. Daily high or low of candlesticks if you are trading in the 1 hr or 4 hr time frame
  4. Fibonacci levels

When an inside bar forms around these locations, it is considered significant. You need to take note of that.

This example is using a daily chart so we could call these setups “inside days” but for simplicity, we will stick with “inside bars”

inside bar trading strategy setup

I have the mother bars high and lows sectioned off and the candlesticks forming inside are called the inside bars.  You can see that all inside bar setups shown are taking place in chart structure locations – in this case resistance because we are in a down trend.

Selling the inside bar pattern (buy setups are the exact opposite):

  1. Identify inside bar patterns in areas such as resistance
  2. Place your sell stop order a few pips below the inside bar
  3. Place your sell stop order a few pips below mother bar
  4. Stop loss can go above the inside bar OR the mother bar

This is a very simple and mechanical trading setup but we are missing one thing……

 

Taking Profits On Inside Bar Setups

Remember that inside bars are consolidation patterns (look at a lower time frame to see it better) and breakouts can lead to a sustained run in price.

You may not want to take profits at something like 3R because the risk is often small on these setups especially if you are using the high of the inside bar (for shorts) for your stop.

You may look at:

  1. Average true range
  2. Use a measured move
  3. Look for turning points below price that caused a large rally.

There is no perfect profit taking plan in any swing trading strategy so whatever you choose to use, be consistent.

 

Day Trading With Inside Bars

You can day trade with this price pattern and you will see a lot of them forming all over the chart (especially in Forex).

This 15 minute chart of the GBPUSD is a great example of how many inside bars actually appear on a day trading chart.

day trading inside bars

What did you learn though?

Most of the inside bars that form will be ignored in this trading strategy.  We are only interested in inside bars that form at certain locations on the chart.  I have highlighted a few structure areas like a resistance level and even a double bottom pattern where we can look to trade.

 

Hikkake Pattern

This chart pattern takes advantage of those traders who are always looking to catch a reversal in the market.

The steps are the same where we looking to find an inside bar forming around locations that matter on the chart.

We want to see the inside candle get taken out with the next candle putting in a higher high and higher low (in the context of a downtrend).  Counter-trend traders will think they’ve caught a reversal and jump in long.

Like all trapped traders, they must exit and in their exits, we get price momentum in our favor because we are looking to follow the the trend.

hikkake pattern

 

In this chart, price is an overall down trend and price had just broken support (with momentum) at the left.

Price is rallying up to potential resistance and price bases below the level.  You can see the mother bar all the other bars are inside bars.  We even have a smaller inside bar just before price pops up over resistance.

Look what happens!

Traders think this move will continue upwards and pile in only to get slammed.  Price then slowly drops to the low of the mother candle range and traders still have hope.

Price slams through the mother candle low, pauses and then another momentum drop to the downside.

Can you see the power in these moves!

 

Best Time Frames

I’m a big fan of trading inside bars on the daily chart instead of trading inside the inside bar on the lower time frames.  This bar formation takes advantage of consolidation and from consolidation comes breakouts.  Trends begin with price breaking out and being in one or two major trends a year can increase your trading account greatly.

You may want to really consider just sticking with the trend and only look to reverse when given a major shift in the dynamics of price (strong resistance broken and acting as support).

Do you trade the inside bar strategy?  Let me know what you think.

 

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