Inside bar strategy is so popular because it identifies us High probability trade setups and also it is very simple to learn and implement. Since the strategy involves no indicators and complicated research it is highly recommended for newbies. The main concept of using inside bars is to trade breakouts. It can either be reversal or continuation breakout. So Lets go deep into it and learn what is Inside bar and how to trade using it.
In the above image you can clearly identify the inside bar. The bar which is fully contained within the high of previous bar (a.k.a Mother bar) is called Inside bar. Hope you now know how Inside bar looks like after seeing the anatomy of Inside bar. Now go on to the next section which explain you what does this Inside bar mean and what can happen when this occurs.
In the image below you can see the price reaches the resistance level and formation of inside bar. Then the breakout occurs which result in trend reversal.
Trend Reversal near Support: The same thing happens in key Support area also. When the price reaches key support level then the buyers will start building long positions and the sellers will cover their short position. All these happens in narrow range so the price consolidates and inside bar is formed. In the below example you can see how trend reversal occurs after price reaching key support and inside bar formation.
In the image above you would have noticed that trend reversed after inside bar formation. You might have also notice that there are also two inside bar which result in price continuation. Do you know what these two extra inside bar mean and why they appeared? The reason is below.
Trend Continuation Pattern: When price moves considerable amount in particular direction then it halts at some point and consolidate to facilitate the following
From this you will know that you should not trade every inside bar you see. Instead you can find high probability trade setup by filtering the low probability trades. It is quite easy to do by following the below rules.
Three thing we need to know for a trade is Entry level, Exit Level and Stop Level. In Inside bar trading strategy we decide it using the high and low price of the Inside bar.
The High of the Inside bar is where we enter the trade if the price break upwards. The low of the Inside bar will be the Stop loss. The Risk Reward Ratio will be considerably better for this strategy than other because here the Stop loss will be very less and so even though you have five consecutive loss all of them can be regained in a single profit trade. The Exit of the trade is determined by key resistance and support levels.
If you go long due to breakout in upper side then your target should be the next resistance level. The reward risk ration will be around 5:1 to 10:1 . You can also use Trialing Stop method with Inside bar trading which will be effective in the trending market.
In the below chart you can see the Entry and Stop loss for the Inside bar trade setup.
In some occasions you will also find consecutive Inside bars. i.e An Inside bar formed within another Inside bar. In those cases you should determine the Entry and Stop Loss using the First Inside bar. In the below chart you can find an example for that.
One last thing we need to learn about inside bar is False Breakout. Even though we have seen about it above it is highly needed to discuss it separately because if we don't avoid it then we might suffer a lot.
False Breakout is said to happened when price hit the Entry price and then moves in the opposite direction and hit our Stop Loss. Even though we have setup Stop loss only for these kind of unexpected moves we can also avoid these by following few things. This will increase the win ratio which inturn increase our profits.
Note: "Inside bar" defines a bar in barchart. it was defined when everyone used barchart. And after Candlestick chart become famous they carried the name Inside bar to candlesticks. Maybe no one want to use the name "Inside Candle". In This article i have refereed all "inside candle" as Inside bar so don't get confused on it.
What is Inside bar?
Inside bar is the bar for which the high is lower than previous bar high and low is higher the previous bar low. What? You got confused and started to scold me on giving a confusing definition. the truth is the definition is exactly what is Inside bar. To Understand what is Inside bar i will give you an example below.
Anatomy of Inside Bar
Where does Inside Bar occurs?
When you see a Inside bar in a trend then it notifies us that there can be a reversal or continuation of trend is going to occur. It usually occurs after a large move in price or during the turning point (i.e trend reversal). They can also be found at the confluent levels like Support and Resistance. The major reasons for inside bar to occur is discussed below.Inside bar Trading Strategy
Trend Reversal Near Resistance: When the price reaches strong Resistance then big players of the Market like Banks and Institutional traders start building short position and at the same time the buyers will be closing their trades because of the price near key resistance level. All these happens in narrow price range. So the volatility in the market reduces and the candle formed will be small. this candle is what we call as Inside bar. The key resistance can be a round number, Fibonacci level, or confluence levelIn the image below you can see the price reaches the resistance level and formation of inside bar. Then the breakout occurs which result in trend reversal.
Trend Continuation Pattern: When price moves considerable amount in particular direction then it halts at some point and consolidate to facilitate the following
- those who went long want to book their profit and leave the market
- those who where in the wrong direction close their trade and book loss.
- those who already in trend add more long position
- those who missed the first trend enters the market.
Ranging Market: One thing which you have to beware trading using Inside bar is Ranging Market. This could be a nightmare for those who trade using inside bar strategy. It happen when the Market movers like banks and institutional traders have no interest in taking any position which leaves the market with less liquidity. So the market have no other option than to trade in narrow ranges. Do you want to know how worse it could be? then see the below image.
From this you will know that you should not trade every inside bar you see. Instead you can find high probability trade setup by filtering the low probability trades. It is quite easy to do by following the below rules.
- Only trade on daily timeframe. if you trade in lower timeframe then you will get more false signal. So you should only trade with inside bar strategy using daily charts. It also requires less time to research and also there wont be a chance to overtrade.
- Never trade against the trend. This is very important so never take a short position if the market is Bullish.
- You should avoid trading during low liquidity days. For example days before NFP news release will always have less liquidity and will throw many false signals to you. So Ignore those days.
Now we have discussed lot about Inside bar, the reason for it to happen, when not to trade. One thing which we have to discuss is about when to trade i.e the entry and exit method for this strategy. It is explained below.
Three thing we need to know for a trade is Entry level, Exit Level and Stop Level. In Inside bar trading strategy we decide it using the high and low price of the Inside bar.
The High of the Inside bar is where we enter the trade if the price break upwards. The low of the Inside bar will be the Stop loss. The Risk Reward Ratio will be considerably better for this strategy than other because here the Stop loss will be very less and so even though you have five consecutive loss all of them can be regained in a single profit trade. The Exit of the trade is determined by key resistance and support levels.
If you go long due to breakout in upper side then your target should be the next resistance level. The reward risk ration will be around 5:1 to 10:1 . You can also use Trialing Stop method with Inside bar trading which will be effective in the trending market.
In the below chart you can see the Entry and Stop loss for the Inside bar trade setup.
One last thing we need to learn about inside bar is False Breakout. Even though we have seen about it above it is highly needed to discuss it separately because if we don't avoid it then we might suffer a lot.
False Breakout is said to happened when price hit the Entry price and then moves in the opposite direction and hit our Stop Loss. Even though we have setup Stop loss only for these kind of unexpected moves we can also avoid these by following few things. This will increase the win ratio which inturn increase our profits.
- Dont trade against the trend. Most of the false breakout can be filtered using this simple rule.
- The above rule will fully stop us from trading trend reversals. So to take benefit from Trend reversal trade we have to enter the trade when the price retest the confluent level.
- Dont go short near strong Support and Long near Strong Resistance levels
Inside bar strategy can be highly profitable if you know how to avoid the traps of false breakout. Hope you would have find some useful from this post. If you have any doubt feel free to ask us using the comment section. And also don't forget to share us and help us back.