Master the Simple Inside Bar Breakout Trading Strategy

inside bar trading strategy

This inside bar strategy has been made by the combination of inside bar breakout and support/resistance breakout. This is a pure price action strategy, and it has a higher winning rate. Big institutions and big traders are deciding either to upward or downward. Nonetheless inside bars, if traded correctly, can be a great way to make money from the Forex market.

One of the most useful characteristics of a profitable inside bar setup is a price movement that continues the trend prior to the inside bar development. If the price of a pair is already trending up before the period of consolidation marked by an inside bar, the breakout is likely to continue that trend. When looking at a candlestick chart, you can spot an inside bar indicator when a given bar’s high and low are fully contained by the bar directly preceding it. This signals a narrowing of price action that can be used to predict upcoming movements outside of this range. Its relative position can be at the top, the middle or the bottom of the prior bar.

This is what makes these patterns so lucrative – the fact that we are trading a breakout after a period of consolidation. Therefore the tighter this consolidation is, the more volatile the ensuing breakout will be. Of course, this isn’t always the case, but in my experience, it holds true more often than not. In my experience, the smaller the inside bar is relative to the mother bar, the greater your chances are of experiencing a profitable trade setup. Ideally, we want to see the inside bar form within the upper or lower half of the mother bar.

During the initial decline, the price action creates an inside bar candle formation on the chart. The next candle which comes after the inside bar breaks the upper level of the range. As you see, the price begins to reverse afterwards, and within the next two bars, the price decrease leads to a break of the lower level of the range. This confirms the Hikkake pattern on the chart, and with that, we should get ready to initiate a trade to the short side. The bullish inside bar setups above formed on the USDJPY daily time frame.

Tread Lightly When Trading Inside Bars Under the Daily Chart

It’s a pattern that forms after a large move in the market and represents a period of consolidation. This is why trading this pattern can be so profitable – you are essentially buying or selling a breakout, or continuation of the preceding trend. For example, an ascending triangle chart pattern, coupled with inside days, may foretell a bullish movement in the stock; conversely, a descending triangle is historically a bearish signal. Other common pairings with inside days as a short-term trading strategy are the relative strength index (RSI), moving average convergence divergence (MACD), and simple moving averages (SMA).

inside bar trading strategy

Although some traders are strong advocates of inside bars as a reliable indicator, most traders likely want to use other chart patterns and technical indicators to evaluate potential price movements. Using these other indicators can lend more credibility to the indications coming from the inside bar. If you can back up short-term inside bars with strong chart patterns or other technical indicators suggesting near-term movement, it might be worth opening a position. But be aware that, when you’re evaluating data from narrower time frames, the validity of your inside bar evidence isn’t as strong as what you could expect from a daily chart. Inside days can be indicative of indecision in the market for a security, showing little price movement relative to the previous trading days.

How to trade an Inside Bar?

An Inside Bar potentially means that the price action recently dominated by the sellers is now weakening. An Inside Bar develops during a strong downtrend when the inside bar trading strategy trading range is completely within the high and low of the previous bar. You are actually taking advantage of traders who are “trapped” from the long breakout.

Of the price action strategies we use here at Daily Price Action, the inside bar is the least common. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. But, it’s more powerful since breakout traders got caught on the wrong side of the move (and their stop orders would push the market in your favour).

The green arrow shows the successful breakout of the inside day formation. Note that we did have two prior attempts to break to the downside, which did not follow thru immediately. But regardless, if we had followed our stop loss placement rules, then we were never in any danger of getting stopped out for a loss on this trade.

Bearish Inside Bar Candle

And volatility in the markets are always changing, it moves from a period of low volatility to high volatility (and vice versa). Now, depending on the close of the Inside Bar, this could represent indecision or a reversal in the markets. This tells you there are indecision and low volatility in the markets.

The first example is what you want to look for while the second is what you should avoid. As you know, I’m a huge advocate of trading from the higher time frames as they tend to cancel out most of the noise from scheduled and unscheduled news events. There are five things you want to look for when evaluating any inside bar pattern.

inside bar trading strategy

We can see a strong downside move occurred as price broke down past the inside bar’s mother bar low.. An inside bar is much easier to take in a trending market because the odds are already in your favor for trading with the trend. The inside bar will many times lead to a breakout or continuation in-line with the existing trend direction.

So as an informed price action trader, you should be looking for the break of the inside bar, which would provide a tradeable opportunity in the direction of the break. As with all continuation trading strategies, the early part of the trend gives the best trades. The first trading setup after MACD crosses the zero line has the highest chance of success. It is a versatile indicator which tells the market trend, and highlights momentum. It is not surprising that many traders have designed trading strategies using the MACD indicator. Remember that an inside bar represents consolidation after a large move.

We mark the inside candle’s high and low as in the previous two examples (the black lines). A conservative trader would identify the ID NR4 breakout when the price action closes a candle below the bottom of the pattern. An aggressive trader would identify the ID NR4 breakout when the price reaches a few pips below the bottom of the pattern.

Five Charecteristic of a Profitable Inside Bar Trade Setup

This is a simple trading strategy that uses MACD as a trend indicator. Always look for signs of strength in the MACD’s favor before committing to a trade. The same holds true for the bearish inside bar pictured above – the formation at the lower range of the mother bar is more favorable as it provides you with a better risk to reward ratio. Again, this assumes that you are placing your stop loss above the high of the inside bar rather than the high of the mother bar. A period of consolidation within a broader trend is the market’s way of regrouping.

  • We’re also a community of traders that support each other on our daily trading journey.
  • In this case, the bearish candle (mother bar) represents a broader downtrend, while the bullish candle (inside bar) represents consolidation after the large decline.
  • But be aware that, when you’re evaluating data from narrower time frames, the validity of your inside bar evidence isn’t as strong as what you could expect from a daily chart.

The pattern signifies the markets unwillingness to push price higher or lower, and hints to the temporary indecision in the market. In the video above there were a series of rejection candles, these are candles with long tails that are obviously showing rejection of a significant horizontal level. We want to see the market closing “off the line”, meaning we want the close of these rejection candles to be on the side of the horizontal level that is in the direction we are looking to enter.

Inside bar: Your new friend in trading – ForexLive

Inside bar: Your new friend in trading.

Posted: Fri, 09 Aug 2019 07:00:00 GMT [source]

It is usually the best to trade in the direction of the main trend, but sometimes there can be nice and profitable trades in the counter-trend direction. That is why I usually take both BUY and SELL trades – depending on which side the market breaks the range of the Inside Bar. Using an Inside Bar Strategy for trading usually means going for safer trades, where both profits and losses are controlled. Also, the core of the Inside Bar trading strategy is that you trade the breakout of a low volatility period. Therefore, you use Inside Bars to place trades with stop-loss and take-profit orders.

Investors haven’t been sure whether or not the previous price movement will continue and they’ve taken a pause. A breakout of one of the extremums of an inside bar dispels doubts and directs a currency pair in this or that direction. The inside bar is a two bar candlestick pattern, which indicates price consolidation. In order to confirm this pattern you need to see a candle on the chart, which is fully contained within the previous bar. In this manner, the inside bar candle should have a higher low and a lower high than the previous candle on the chart.

What this Indicator Does

This indicator is a very simple tool created specifically for experienced Straters. It was created for those Straters who fully understand the Strat Scenarios, are in need of an easy to use tool, and do not want or need a lot of messy markings on their chart. The indicator simply allows the user to color code the Strat 1, 2 ,3… Inside Bars are very a useful, simple and effective technique – especially when combined with other patterns and strategies. An inside bar is generated when a smaller bar is created with its movement’s high and lows inside the previous bar. In other words, the highest price of the bar is lower than the highest price of the previous bar, and the lowest price is higher than the lowest price of the previous bar.

Traders should open a position when the price is still within the range established by the inside bar or when the price breaks just above the upper level of the inside bar. By the time you wait for the price action to move swiftly in one direction, you’ve already sacrificed a huge chunk of your would-be profits. The best use of inside bars as a technical indicator is on daily charts. An inside bar illustrates that consolidation has taken place over the course of an entire trading day, which signals that the shrinking range is due to expand and become more volatile. The inside bar strategy 2 is composed of a trendline breakout and an inside bar breakout. A trendline is made up of at least three consecutive bounces of the price that make it a key level.

An inside bar pattern is a multi-bar pattern that consists of a “mother bar” which is the first bar in the pattern, followed by the inside bar. An inside bar pattern can sometimes have multiple inside bars within the same mother bar. The inside bar is yet another “tool” in your price action toolbox that will add to your trading strategy which when mastered will help improve your chances of long-term trading success. The Hikkake pattern is another variation of the inside bar candlestick. Patterns can and do fail, but many times these failed patterns can offer nice trading opportunities for those whose are quick to recognize the fakeout.

The market moves from a period of low volatility to high volatility (and vice versa). And with a smaller stop loss, you can put on larger position size and still keep your risk constant. So, a better way to set your stop loss is 1 ATR below the low of the Inside Bar (for long trades) — so your trade has more “breathing room”. Now, I’ve covered a lot about Inside Bar trading strategies and techniques. So, when the price “stalls” after a pullback (in the form of an Inside Bar), you want to enter as soon as the price resumes in the direction of the trend.

Is Inside bar a good strategy?

Inside bars are probably one of the best price action setups to trade Forex with. This is due to the fact that they are a high-chance Forex trading strategy. They provide traders with a nice risk-reward ratio for the simple reason that they require smaller stop-losses compared to other setups.

And this is why you cannot break above the 10-period moving average. The second is when the price is respecting the 10-period moving average. Other traders would do it differently, but ultimately, this entry itself is not going to be profitable in the long run.

What is 3 inside bar strategy?

The Three Bar Inside Bar Strategy (TBIBS) was authored by Johnan Prathap in the Stocks and Commodities Magazine, March 2011. This strategy uses closes and highs of the last three bars to determine its entry signals. Exit points are calculated from user determined Profit Targets and Stop Loss percentages.

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