This is another post in my beginner's series on chart patterns. The last time, we talked about Pin Bars and how they can be used to predict turning points on the chart. Today we will take a look at a very different type of chart pattern, Inside Bars. We will look at some examples, what they can tell us and how they can be traded.
What They Look Like
An Inside Bar (or candle) is a bar that is inside the total price action of the previous bar. It doesn't matter if the previous day's bar or the current Inside Bar is red (down) or green (up).
It also doesn't matter if the Inside Bar is inside the body of the previous bar or if it is partially inside the wicks, you are looking for it to be inside any part of the bar. Here is what an Inside Bar looks like:
Why They Happen
You do not need to know why inside bars happen, all you have to know is that they signal when the market is taking a rest and is consolidating into a smaller price range than that of the previous day. As you probably know, when price action starts to slow down, it usually means that there will be a breakout at some point.
You can think of an Inside Bar as a spring that is being compressed. At some point, it will expand in the direction of least resistance and that will present a trading opportunity.
Trading Inside Bars
The classic way to trade it is to go long if price breaks out above the previous bar or short if the price breaks below. The stop loss generally goes above or below the previous bar in the opposite direction. You could use an Order Cancels Order (OCO) order so that you do not get whipsawed. The Inside Bar setup is generally traded on longer frame, such as the daily chart because it has a higher probability of working.
Here are illustrations of where you would enter your trades and place your stops if you are using the entry method explained above:
Now let's look at a few examples of Inside Bars on a daily chart. The arrows show the entry orders that would have been entered on this chart. The second and last signals probably would not have been successful (depending on how you traded them), but the other signals should have yielded a nice profit.
Keep in mind that this signal is not perfect, like any other trading signal, there will be losses and gains. But as you can see, it is a method that might work, given the right rules.
Other Inside Bar Resources
Now let's take a look at what others have to say about inside bars.
- Trading Inside Bars (And How to Trade Them) – DailyFX
- The Inside Bar Breakout Trading Strategy – Forex Crunch
- Inside Bar Forex Trading Strategy – Learn to Trade the Market
- Targeting entries with inside price bars – Futures Magazine
- Why You Cannot Trade Every Inside Bar – 2nd Skies Forex
Inside Bars may not be something that you eventually end up trading, but go through a few charts and see if it is something that interests you. If it does, then create a set of rules and be sure to test it thoroughly before you ever trade it live.
You can also test it in our community if you want to refine this idea and create a solid system around it. Even if you do not trade this setup, it can be used as a confirmation when used in conjunction with another trading system.