The Inside Bar Trading Strategy is definitely one very simple but powerful forex trading strategy which new as well as advanced forex traders can use.
The Inside bar is one of the most simplest forex trading strategies which a new forex can trader can easily understand and use.
The Inside Bar Trading Strategy is based on the Inside Bar.
If you don’t know what an Inside Bar or How To Trade The Inside Bar then I will explain and show you all that in here.
If you don’t know inside bars or what kind of trading signals inside bars produce then I believe you are missing out on one of the most simple yet effective forex trading chart patterns.
Because Inside bars are one of the best price action trading candlestick patterns you can ever trade because they have fairly small stop loss distances and the reward can be very high compared to other forex trading strategies.(Very good Risk:Reward Ratio)
If you trade in the daily time frame, your trading success rate can be very high.
Before we get to the rules of the Inside Bar Trading Strategy, you may be wondering what an inside bar is…
Well, here’s your brief lesson.
WHAT IS AN INSIDE BAR?
The main inside bar setup consists of 2 candlesticks.
- first candlestick(the preceding candlestick bar) is what is called the “mother candlestick” and the
- next 2nd candlestick is called the “baby” candlestick”. This baby candlestick is the inside bar. Imaging a pregnant women? Makes sense, doesn’t it? Well that’s the exact picture of an inside bar candlestick formation.
Look at the forex chart below…that’s an inside bars look like!
The inside bar is a candlestick that:
- forms within the trading range(or shadow) of the preceding bar.
- it is a two candlestick formation
- the mother candlestick can be either bullish(green) or bearish(read)
- The inside bar can be bullish or bearish.
WHY DO INSIDE BARS FORM?
What drives inside bars to form the way they do? What is the reason behind the inside bar candlestick formation?
If you are interested, keep reading this, but if you don’t care,just skip this to go down further below to get straight into the inside bar trading strategy.
There are two very reasons why inside bars can form and here they are:
- inside bars can form in a time or price/market consolidation
- a time of indecision
What generally tends to happen is after a big price move either up or down, the market starts to consolidate and inside bars form.
Inside bars can form around
- areas of support & resistance levels.
- daily high or low of candlesticks if you are trading in the 1hr or 4hr timeframe.
- fib levels.
When an inside bar forms around these locations, it is considered significant. You need to take note of that.
BEFORE YOU TRADE THE INSIDE BAR, HERE ARE SOME TRADING TIPS YOU NEED TO TAKE NOTE OF
Some thing you got to know:
- if an inside bar forms anywhere on chart…
- if that location on your trading chart does not correspond to support or resistance levels or pivots or fib levels…
- then that inside bar doe not really have much significance at all
why because its like A King Without A Crown (if that is the best analogy I could give)
It makes more sense to inside bar trade an inside bar when it forms around areas of support & resistance levels, pivots,daily high or low of candlesticks if you are trading in the 1hr or 4hr time frames and also on major Fibonacci levels like 32.8, 61.8 & 50.
THE TRADING RULES OF THE INSIDE BAR TRADING STRATEGY
- first identity if you are in a downtrend.
- then when an inside bar forms, you place a sell stop order anywhere from 3-5 pips below the low of the inside bar when that inside bar closes.
- place your stop loss anywhere from 5-10 pips above the high of the inside bar.
- exit on the close third candlestick-your candlestick count should include the inside bar(which should be number 1). See chart below for more clarification.
- Another alternative method of exiting a trade is to trail stop your trade and lock your profits as the trade moves in favor. The chart below clarifies how you do this.
The buying rules for the inside bar trading strategy are just the exact opposite of the selling rules. Here they are:
- first identity if you are in an uptrend.
- then when an inside bar forms, you place a buy stop order anywhere from 3-5 pips above the high of the inside bar when that inside bar closes.
- place your stop loss anywhere from 5-10 pips below the low of the inside bar.
- exit on the close third candlestick-your candlestick count should include the inside bar(which should be number 1).
- Another alternative method of exiting a trade is to trail stop your trade and lock your profits as the trade moves in favor.
ANOTHER INSIDE BAR TRADING TECHNIQUE
Another popular way to trade the inside bar is to place a buy stop and sell stop order on both sides of the inside bar… here’s how:
- when an inside bar forms, place a buy stop order above the high of the inside bar and your stop loss below the low of the inside bar-orders should be placed at the close of the inside bar.
- At the same time, also place a sell stop order below the low of the inside bar and place that stop loss above the high of that inside bar.
- if the pending order on one side is activated, than cancel the other pending order. For example, if buy stop order is activate when the high of the inside bar is broken, then you need to cancel the sell stop order.
- You can use the same trade exit strategies described previously.
Why would you place buy stop order and sell stop order on both sides of the inside bar?
The answer is really simple: you want to capture the breakout of the high or low of the inside bar. Remember that an inside bar is like a coiled spring that is not yet released and it can spring in any direction so placing to opposite pending orders allows you to capture the market move in what direction it moves.
BEST TIMEFRAMES FOR TRADING THE INSIDE BAR
The best timeframe for trading the inside bar is the daily.
You can also try it out on the 4hr charts as well.
DISADVANTAGES OF THE INSIDE BAR TRADING SYSTEM
- sometimes, you will have false breakouts of inside bars which will activate your order only to turn back and trigger your stop loss-so you will get stopped out with a loss. You should expect that.
- don’t be tempted to try inside bar trading on smaller timeframes below the 4hr timeframe, the results may not be good.
ADVANTAGES OF THE INSIDE BAR TRADING SYSTEM
- forex trading entries based on price action.
- you can make huge profits if you trail stop your trades like I shown you above on one of the charts and keep your trade running for days.
- if you are trading the daily chart, then the inside bar trading strategy needs only 5minutes a day of your time to cheack the daily bars, place your pending buy stop or sell stop orders and go away. Come back half a day later or a day later to see what pending order was activated and then cancel the other that was not activated.
- easy to spot and not complicated at all to spot the inside bar trading setup.
So there you have it, the inside bar trading strategy, its simple, take less time to spot the inside bar and trade it.