As you may well know, markets spend most of their time consolidating or ranging, so finding a favorable inside bar setup within a trending market can be a challenge. However, when you know what to look for, these setups can be quite profitable. The inside bar candle pattern is a simple, effective price action trading setup.
By the end of this lesson, you will know what the inside bar pin bar combination looks like, how and why it forms as well as how to profit from it over and over again. There’s no doubt that inside bars can be a profitable way to trade the Forex market. After all, it’s a setup that I teach as part of my price action courseand one that has served me extremely well since 2009.
How to trade an Inside Bar?
By using the 50% entry strategy we were able to secure an entry with a 45 pip stop loss. I strongly advise only taking setups where there is a key horizontal level or trend line acting as an inflection point in the market. This will also help you to decide if a setup has become unfavorable.
- The second is when the price is respecting the 10-period moving average.
- This means you could get a good R multiple on your trade in a short amount of time.
- A period of consolidation within a broader trend is the market’s way of regrouping.
- In each case, it would signal that the consolidative range is ending in favor of a downward price movement.
The price action might reverse direction and quite possibly could break the range of the pattern from the opposite side. This will trigger your stop loss, because it should be located on that side of the range. Therefore, you will be stopped out of the position with a small loss. What is most important is that the inside bar trading setup must adhere to pre-defined rules that the trader sets up per his own trading plan.
Inside bars are a valuable indicator of a breakout, but traders can never guarantee that the price will break the way they’ve predicted. A stop-loss order should always be placed on any trade that relies on an inside bar to identify price consolidation. When an inside bar develops, it signals consolidation that could preview a breakout coming in the near future.
The Inside Bar Trading Strategy Guide
The entry and stop loss placement for the inside bar pin bar combination are very similar to that of the pin bar strategy. This next one is a bit different from how we trade a typical pin bar setup. The difference here is that the close of the pin bar must be contained by the range of the inside bar. The only exception here is if you get a “strong” close whereby the pin bar engulfs the inside bar in a way that is favorable for the setup. More often than not, when you have a false break of any kind, the market continues in the opposite direction. For example, a false break of a key resistance level will often result in a steady decline shortly thereafter.
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. This is my preferred approach as you’ll enter the trade as the price moves in your favour — but there’s a possibility of a false breakout. The next and perhaps the most influential characteristic is the key level. The entire premise of this pattern relies on a key level of support or resistance. The inside bar setup is capable of producing consistent profits, but only to the traders who mind the five characteristics discussed above.
The inside inside bar trading strategy represents the stalemate between buyers and sellers. The ensuing bullish pin bar represents the false break of the inside bar and the key support level. This aggressive push higher to hold support is what gives credence to the reversal pattern. When the price action completes an inside candle on the chart, you should mark the low and high of the Inside Bar consolidation range. Since the Inside candle on the chart is a sign of a consolidating market, we can draw a horizontal support and resistance level around this range in anticipation of a future breakout. When the price exits the inside bar range, we expect that the price action will continue to move in the direction of the inside bar breakout.
Previously, you’ve learned how Inside Bar allows you to catch reversals in the market. Instead, for my Inside Bar strategy, I prefer for the price to make the reversal move first and then form an Inside Bar. That’s not smart because it’s a low probability trade especially when the market is in a “choppy” range. This is a standard Inside Bar candle where the range of the candle is small, and it’s “covered” by the prior candle. Below you will find some of the key points to keep in mind as you begin to trade this pattern on your own.
Mind the Close
However, there is another dimension at work here that deserves our attention. Last but not least, the size of the inside bar relative to the mother bar is extremely important. This idea piggybacks off of number four above, where the inside bar forms in the upper or lower range of the mother bar. It’s mostly due to the fact that this particular strategy requires a strong trend in a market that has room to run.
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This sideways price action represents consolidation, which is what you want to avoid when evaluating an inside bar setup. 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 illustration below shows the characteristics of an inside bar. When you are buying, the stop loss should be located below the lowest point of the inside bar. Though this might seem a bit confusing at first, it is quite simple once you take a bit of time to understand it.
Use the 50% entry strategy whereby you enter on a 50% retrace of the pin bar. This is my preferred method as it provides me with a much more favorable risk to reward ratio. Like any of the strategies we trade here at Daily Price Action, there are certain characteristics that determine whether or not a setup is valid. Remember that an inside bar represents consolidation after a large move. 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.
This is still an Inside https://g-markets.net/ as the range of the candles is “covered” by the prior candle. Nial Fuller is a Professional Trader & Author who is considered ‘The Authority’ on Price Action Trading. He has a monthly readership of 250,000+ traders and has taught over 25,000+ students since 2008. The prior bar, the bar before the inside bar, is often referred to as the “mother bar”. You will sometimes see an inside bar referred to as an “ib” and its mother bar referred to as an “mb”. See The Definitive Guide to Choosing a Stop Loss Strategy for more information on the topic.
As with any chart pattern, though, inside bar trading isn’t perfect. It isn’t reliable when applied to shorter time frames, which can make it less effective for day trading and intraday trading. Inside bars are more common on these shorter time frames, so traders looking for inside bars are likely to get a lot of “false positives” when looking for breakout potential. To evaluate this risk/reward ratio, you may want to consider other technical indicators and chart patterns you regularly use in your trade analysis. Using these other indicators can lend more credibility to the indications coming from the inside bar.
If you trade the Inside Bar in this scenario, you know that you have the trend in the back of you. It boils down to yourrisk management,your consistency, and everything else. I look to sell below the low, and stop loss above the high of the inside bar. You don’t have to follow me, you can trade a variation of it, it’s entirely up to you.
Then, traders would look to go short on the break of the Inside Bar. Many traders would spot an Inside Bar and they’ll trade the breakout of it. Below are three things that must be present in order for this pattern to be considered tradable. These are in addition to the actual inside bar and pin bar, which are of course mandatory. Remember how I mentioned that the inside bar is most commonly known as a continuation pattern?
The first being the key level, followed by the inside bar and then the pin bar. The trade opportunity comes on a break of the mother bar high or low depending on the orientation of the setup. For example, a bullish setup would call for a break of the mother bar high while a bearish setup would call for a break of the mother bar low. For those who are familiar with how I like to trade, you know that I’m a big fan of the inside bar as well as the pin bar. Both of these strategies are extremely reliable and profitable when used correctly. 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.
If you are a fan of pure price action Forex trading using candlestick patterns, then this lesson will be of particular interest to you. Today we will discuss a powerful candlestick formation which can often precede a sharp price move. Because an inside bar is an easy indicator to identify, it’s a strong data point for both amateurs and seasoned traders to consider. Just make sure to use the inside bar as a starting point for further evaluation of potential trading positions. For more information on trading inside bars and other price action patterns, click here. The inside bar pin bar combo can be a great addition to your trading arsenal.