The inside bar strategy is very popular with professional traders. Beginners may also benefit from a continuation and reversal candle formation that is pretty easy to read. However, the strategy is often underestimated by those who are new to the financial market. At the same time, experts use it to predict the big market moves and trend reversals.
The concept will work mainly for short-term trading tactics. It helps to determine the price reluctance below or above the preceding candle. In other words, the strategy makes it possible to make wise and fast decisions, which is crucial for traders who prefer going short.
It is a pattern where the price action is depicted with a smaller inside bar that comes with the high that is lower than the previous one. Vice versa, the low is higher than the previous bars’ low. To identify the relative position, traders will have to look at the bottom or middle of the targeted (prior) bar.
The prior bar is located before the inside bar. Professional traders often call it the “mother bar”. For this reason, you might see abbreviations that identify a particular bar:
Some traders make a common mistake when identifying the inside bar. When they see two bars with the same lows and highs, they consider it as the inside bar pattern, which is wrong. The difference between highs and lows may show crucial information and it should never be equal. So, here is what you can read from the pattern:
An additional benefit of the inside bar strategy is the ability to use key support and resistance levels when generating reversal signals.
If you need to identify the inside bar, you will need to follow several simple steps:
As a rule, professionals use the pattern to trade instruments on a trending market. The style and tactics used for the strategy refer to a so-called breakout play. If you plan to use key chart levels, you may benefit from counter-trend trading that mainly refers to the inside bar reversal.
Traditionally, traders use the mother bar to put a stop loss at its high or low. As a result, you fill the entry order every time the price breaks out through the mother bar from above or below. If the mother bar looks bigger than usual, it is better to set a stop loss at the halfway point. In all other cases, the best way to put a stop-loss is to use the end opposite the MB. Keep in mind that there are no particular rules to set stop losses with the inside bar trading strategy. You may choose any point or level that fits you most.
If you do not want to follow the classical trading strategy, you may try another way to use the inside bar. It will let you reveal some info that is hidden behind the candle pattern. Some traders consider the formation of the inside bar as the market's inability to move prices lower or higher. The reasons for that may include:
It does not matter why it happens. The key point here is to identify potential market volatility other traders cannot see. Every time you see traders tepid bidding the price lower or higher, it means that volatility is about to increase. Of course, we cannot say that the inside bar actually reveals hidden market volatility. On the other hand, it definitely signals markets are about to make a big move in reference to a particular asset class. In other words, it means additional opportunities to fill a trade and make some good profit.
The inside bar comes with a more complex approach to forming trading patterns, as it uses reversal and continuous signals. Besides. The repeated breakout may increase the risk of using the inside bar. For this reason, it is better to consider the concept more like an extra prompt rather than a stand-alone strategy.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.