This is one of the most popular technical chart patterns around and there are several trading strategies that utilize this pattern. Before we get into actual trading strategies, let's see at what an Inside Bar looks like, what it can tell us, and why it happens.
An Inside Bar (or candle) is a 2-bar pattern where a bar is inside the total price action of the previous bar. In other words, the Inside Bar has a higher low and lower high than the previous bar. When this happens the previous bar is known as the mother bar. It does not matter if the Inside Bar is bullish or bearish, all that matters is where the Inside Bar prints relative to existing price action.
Before we get into why they happen, here's what they look like.
What is an Inside Bar?
The only thing that you have to take into account when identifying an Inside Bar is the high and the low of the previous bar.
When the high of the previous bar (or candle) is higher than the current bar and the low of the previous bar is lower than the current bar, then current bar is an Inside Bar.
Here's what it looks like…
Why Inside Bars Form
There can be many things that can cause an Inside Bar to form.
- A big news event might be coming up
- The traders who are in control (bulls or bears) are taking a break before continuing their campaign
- The traders who are in control (bulls or bears) are losing control, or are ready to stop their campaign, and price will reverse soon
- And more!
You don't need to know why Inside Bars happen, you just have to understand what the price action is telling you.
As you probably know, when price action starts to consolidate, it usually means that there will be a breakout.
We see this on longer timeframes when price forms a “box,” or a tight range. Here's a dramatic example of a range breakout.
Not all breakouts are this strong, but this is a good example of a scenario when a range lead to a big breakout.
You can think of an Inside Bar as a compressed spring.
For example when you sit on a bicycle seat with springs, you compress the springs whenever you go over a bump.
But the springs never stay compressed, they always bounce back to their original height.
A similar thing happens with Inside Bars.
Price action becomes “compressed” into a tighter range and at some point, it has to break out and resume normal volatility.
Trending Inside Bars
There are 2 basic types of Inside Bars that traders use to enter trades. The first one is the trending Inside Bar.
When looking for these types of trades, you first want to identify a strong trend. You can use moving averages, a momentum indicator, or simply just look a the price action to see strength of the trend.
Here are 2 examples of this pattern.
The way that many traders use this type of Inside Bar is to enter on a break above or below the Inside Bar.
If it's a bullish trend, then the stop entry would be set a couple of pips above the Inside Bar. In a bearish trend, then stop entry would go below the bar.
Generally, the stop loss would go on the other side of the mother bar. So if you took a short signal, the stop loss would go above the mother bar. For a long signal, the stop loss would go below the mother bar.
For many traders, it helps to have a specific definition of a trend.
Some traders like to use multiple moving averages to define a trend. They usually use 2-3 moving averages and when they are in order from shortest to longest period, that call that a valid trend.
To get notifications when Inside Bars print on your MetaTrader chart, you can use one of our handy alert indicators.
Countertrend Inside Bars
The other type of Inside Bar trading signal is the countertrend Inside Bar. This type of Inside Bar appears at support and resistance levels.
It also helps when the mother bar has the highest high or lowest low at the support/resistance level.
Here are a couple of examples.
As you can see, an Inside Bar can telegraph that price is slowing down and is getting ready to reverse.
Just be sure that the bar is at a solid support or resistance level.
When to Avoid Inside Bars
Just like any other price action pattern, you don't want to take every Inside Bar signal that comes your way.
That's a recipe for disaster.
If you trade every single Inside Bar signal, you WILL blow out your account.
So here are a few times when you should avoid taking an entry.
Choppy Price Action
A common mistake that traders make is to take signals in a choppy market.
This is what a choppy price action signal might look like. As you can see, there were several large back-and-forth bars before this Inside Bar printed.
Price action is also in a range and there is no obvious trend or support/resistance level. You might have been lucky if your took a long trade, but over time, you'll lose more of these trades than you win.
So stay away from choppy or volatile price action. It's not worth trading and will only lead to losses.
Not a Strong Trend
Before trading a trending Inside Bar, be sure that there is a strong trend in place. That may sound obvious, but many traders are so eager to enter a trade, that they don't spend a few extra seconds examining the strength of the trend.
Of course, a trend can be difficult to identify, so be sure that you have a concise definition of what a trend looks like for you.
Regardless of how you define a trend, spend a lot of time in Forex Tester or using screenshots to look at many different types of trends. Make sure that your method of identifying a trend really does give you an edge.
In addition, you can't just look at your charts once.
Review them on a weekly basis to keep your skills sharp.
It's like a basketball player who practices free throws.
Use it or lose it.
Not a Solid Support/Resistance Level
The final commonly made mistake is to take a reversal trade at a level that is not a significant support or resistance level.
Again, some traders can get so wrapped up in taking trades that they forget to examine the quality of the signal. If you are still struggling with drawing support and resistance levels, read this guide.
It will take you through the process of identifying the most significant levels on any chart.
Keep in mind that you can make almost any line fit some sort of trend or support/resistance level. Try it…just draw a random horizontal line somewhere on your chart.
You can probably make a (weak) case for the line being a support or resistance level.
The key is to be able to understand which levels are most likely to hold and which ones are just random lines on a chart.
Again, learning to identify important support and resistance levels is all a matter of practice.
To get more practice, draw major levels on all of your charts, then go back to them later and see if price ended up respecting those levels. After a few weeks of this exercise, you'll start to get the hang of it.
Conclusion
Stay tuned for future posts, where I share actual Inside Bar trading strategies and test each one to show you what works and what doesn't.
If you don't want to wait for that, start doing some testing for yourself right now…
You can do this by following these steps:
- Write down a well-defined trading plan. You can get a trading plan worksheet here.
- Backtest your trading plan to see if it has an edge.
- If your testing is profitable, forward test it in a demo account for a few months.
- From there, if you're happy with the results, you can make the decision to start trading the strategy live.
To start tracking Inside Bars on your charts, use one of our handy alert indicators.
You can also test your strategy 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. To get more chart patterns that you can test, go here to get the PDF cheat sheet.
Now get to work!
