3 Common Errors When Trading The Inside Bar Strategy

3 Common Errors When Trading The Inside Bar Strategy

Inside bars are short-cut patterns, because they are an abbreviation of a more complex pattern. If you’re seeing this on a daily chart, it means that on the hourly chart, there’s a triangle pattern.

By using the mother bar to time your entry, you’re confirming that the market has broken out from the current range. To illustrate the significance of this requirement, I’ve included two annotated charts below. To learn more about how to trade the inside bar and other price action patterns properly, check out my price action trading course. You probably have read some of my articles on daily chart trading, if you haven’t, you should.

While most texts talk about inside bars as reversal candlestick patterns, the truth is that inside bars can act as both continuation as well as reversal patterns. What determines it as a continuation or reversal pattern is dictated by the overall trend and the larger context. When trading with Inside bar price action pattern, the important point to bear in mind is that they often come ahead of an important price move.

The inside bar setup is capable of producing consistent profits, but only to the traders who mind the five characteristics discussed above. Last but not least, the size of the inside bar relative to the mother bar is extremely important.

If the mother bar has a weak body then it might not be very sure to trade in it. The body and the size of the mother bar is extremely important, and if the size of the inside bar is small compared to the mother bar it can help you to generate much better results.

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. Notice how the bullish inside bar in the above illustration formed at the top of the mother bar’s range. This is what you want to see in a favorable setup, especially if you are using the more aggressive stop loss placement, which means placing your stop loss below the inside bar rather than the mother bar.

It is important that the breakout thru the opposite side occur within 2-3 bars of the original breakout. 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.

Time Frame Matters

• Inside bars are short-cut patterns, because they are an abbreviation of a more complex pattern.
• Said differently, the previous candle completely “engulfs” the inside bar.
• That is one way to trade the inside bar and to place a pending stop order on the high/low of the mother bar(candlestick) and the only issue with that though is the large stop loss distance if the mother bar is too long.
• The inside bar will many times lead to a breakout or continuation in-line with the existing trend direction.
• If the high or low is equal to that of the mother bar, it doesn’t count as a true inside bar and we shouldn’t be risking our money on it.

The inside bar candlestick pattern is often not given enough importance, but I hope with this article to reach more traders who want to learn about it. The inside bar formed in the middle of a trading range in a bullish market which was considered as a continuation. I hope this lesson has provided you with some helpful tips that you can implement in your trading plan. I get into much more detail in my Forex trading courseon how to trade price action inside bars as well as several other setups I use when trading my own account. I see many traders making the mistake of taking inside bar trades without clearly defining their support and resistance levels.

Below are two examples of inside bar patterns that formed in different market conditions. The first example is what you want to look for while the second is what you should avoid. There are five things you want to look for when evaluating any inside bar pattern.

Traders then look to trade breakouts after a new high/low is formed. The Hikkake candle pattern represents the failure of the inside bar. When the inside bar pattern fails and returns to break the opposite level of the range, within 2-3 bars, we confirm a Hikkake pattern.

This chart pattern takes advantage of those traders who are always looking to catch a reversal in the market. You can day trade with this price pattern and you will see a lot of them forming all over the chart (especially in Forex). The bar on the left is called the “Mother Bar” and the inside bar forms within the range of the previous candlestick.

An Inside Bar pattern is a two-bar price action trading strategy where the inside bar is smaller and within the high-low range of the previous bar (popularly known as mother bar). As the name suggests, an inside bar engulf inside of a large candle, some call it as a mother bar. It’s a pattern that forms after a large move in the market and represents a period of consolidation.

Alternatively, inside bars can also point to periods of consolidation, and indecision prior to a pending breakout. They frequently provide traders with a low-risk place to join a trade, or a logical exit point.

You can always discuss Inside Bar Strategy with the fellow Forex traders on the Trading Systems and Strategies forum. A bullish inside bar after a downtrend is shown on the example chart. The inside bar is easy to identify and the stop-loss level is rather conservative here. The target was set to the resistance level formed by the previous downtrend. As you can see, the currency pair rate reached the take-profit level without any problems.

However, it isn’t a setup that occurs often, at least not in a favourable context. This is why I don’t advocate using the inside bar as your only setup to trade the market. By doing so, you limit your trade potential to the point that you are likely to begin taking subpar setups.

Rarely in trading is anything perfectly clean especially if you take into consideration the mechanics of the market. Anybody that tries to tell you that price needs to react perfectly is confused and most times close is close enough. Keep in mind that the first trade is actually going against the trend that was occurring. Price action lead us to consider a short trade and we would know we were wrong if price reverses and keeps moving upwards. There are several inside candlesticks on this chart and the majority of them do not lead to any type of trade that is worthwhile.