Inside Bar Pattern Price Action Strategy Explained With Examples
In other words, relying solely on a mechanical inside-bar strategy is unlikely to be profitable. It is important to incorporate more effective tools into your trading approach. Inside bars work well in different market conditions and timeframes, whether you are trading trends or looking for reversals.
- When the inside bar appears within corrective patterns, the probability of success drops significantly.
- Learn how automated trading strategies eliminate emotions and improve consistency.
- These are actually low volatility ranges and the subsequent course of action will be highly volatile which creates a good swing trading opportunity.
- So, when you see multiple Inside Bars together, it’s a strong sign the market is about to make a big move soon.
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This period of consolidation allowed the market to “reset”, or shake out profit takers and attract new buyers for the next inside bar trading leg up. A period of consolidation within a broader trend is the market’s way of regrouping. In an uptrend, the consolidation is triggered when longs decide to begin taking profits (selling). This causes the market to pullback, where new buyers step in and buy, which keeps prices elevated. This pattern continues for days, weeks or even months until new buyers are able to once again outweigh the sellers and drive the market higher. If you trade the inside bar with the trend, the probability of success is quite high.
A stop-loss is typically placed just beyond the opposite boundary of the inside bar. Stop-loss orders are typically placed just outside the inside bar’s range — below the low for bullish breakouts and above the high for bearish breakouts. When you discover an inside bar breakout on the chart, you will most likely want to trade in the direction of the breakout. 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.
a real-world example: inside bar day trading in action
If an inside bar setup develops outside of those hours, then do not take the trade as the market is less likely to trend far enough to yield a positive risk to reward ratio. To do this, we will use one of the most popular technical indicators—specifically, an oscillator—the relative strength index (RSI). However, we will not use the RSI merely to indicate whether the asset is overbought or oversold; instead, we will leverage its ‘leading’ capability as a divergence tool. Simply put, a divergence occurs when the price and a technical indicator move in opposite directions.
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- The ability to maintain patience, to wait for high-probability setups, and to manage emotions is what distinguishes successful traders in the long run.
- This pattern often appears after a strong trend, signaling either a pause before continuation or a potential reversal.
- This could have been a stop-loss hunting targeted at retail traders, while a larger player was building a long position.
- Inside bars are one of the many Japanese candlestick patterns traders follow in the forex market.
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. 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 30,000+ students since 2008. Your specific risk tolerance will determine which level you choose, but using these natural boundaries helps keep your stop placement objective rather than arbitrary. 1 — the inside bar in the indecision zone that has been highlighted by the indicator.
Traders watch for a drop below the mother bar’s low to confirm. A valid inside bar is a candlestick fully covered by the one before it. Its high is below the previous bar’s high, and its low is above the previous bar’s low.
