The inside bar pattern is probably one of the most simple yet effective candlestick patterns out there. However, many traders fail in trading them properly and as a result lose money.
Like any other price action signal, there are a number of subtle differences between a ‘good’ and a ‘bad’ inside bar signal that can make the difference between winning or losing money.
Of course, not every inside bar trade will be a winner, however once you know how to trade them properly you are putting yourself in a position to make money with the inside bar pattern.
The inside bar is probably one of the most simple yet effective candlestick patterns out there.Tweet
In this lesson, we’re going to discuss how to increase your chances of profiting from the inside bar pattern. But before we do that, let’s first take a look at how an inside bar forms and what the pattern represents.
What is an inside bar?
The inside bar is a two bar candlestick pattern that consists of a “mother bar” which is the first bar in the pattern, followed by the “inside bar ”. The inside bar candle should have a higher low and a lower high than the previous “mother bar”.
Here is what standard inside bars look like:
The inside bar indicates that price has consolidated, which is why this type of trading pattern can be so profitable – you are essentially buying or selling a breakout, or continuation of the preceding trend using momentum to your advantage.
Trading the inside bar pattern can be so profitable letting you capture the trend and use momentum to your full advantage.Tweet
Here is a sample code which you can include on cTrader to easily identify Inside Bars while trading:
Why not use an Indicator?
The Inside Bar is fairly easy to spot on the chart, but using an Inside Bar indicator can assist you in quickly finding these patterns on your charts.
I have created an indicator that you can download for FREE for cTrader. All you need to do is gain access to my library of free resources.
Improving the Inside Bar Strategy
Okay great. You now know what an Inside Bar is and how such pattern is formed but how do you go about increasing your profits when trading them?
I like many traders made countless of mistakes when trading Inside Bars. Read on to find out my top three things I look for when assessing any inside bar pattern.
Think of this as a checklist for trading Inside Bars so you can stop making the same mistakes I did.
Time Frame Matters
First and foremost, the time frame you use to trade inside bars is extremely important. I have found that inside bar strategies work best on the 4-hour or daily charts and as a general rule, any time frame less than the 4-hourly chart should be avoided.
The reason the inside bar works best on the higher time frames such as the 4-hour or daily chart is because you don’t get all the ‘noise’ that you do on the lower time frames, therefore less false signals are produced. The daily chart in particular acts as a natural filter and therefore produces cleaner price action patterns that can help put the odds in your favor.
By switching to higher time frames you are able to tune out and ignore the daily ‘noise’ and keep your perspective clear. Time frame is everything.Tweet
Below you will see the power of the daily chart compared to the 1-hour chart and why I only trade inside bars on the higher time frames.
If you look at the one hour chart, you will notice that many of the inside bars on the 1-hour chart failed to produce any profitable setups. Too many false signals are produced making the lower time frames not worth trading at all.
In contrast, you will notice that all of the sideways movement on the 1-hour chart has represented itself nicely as one inside bar pattern on the daily chart, which worked out quite nicely as a sell signal on the GBPUSD Pair.
By switching to the daily time frame you are able to cut out most of the ‘noise’.
The Trend is Your Friend
I’m sure you have heard this one many times – the trend is your friend. As common as the saying may be, it has never lost it’s significance when it comes to forex, and especially when it comes to trading inside bars.
In my opinion an inside bar pattern is best traded as a trend-continuation pattern on the 4-hour or daily chart. Trying to trade inside bars against the daily chart trend is very hard, especially if you’re a beginner or relatively new.
Don’t get me wrong, it can be done, but it’s best that inside bars are traded as a trend-continuation pattern and thought of as ‘breakout’ plays which can provide very good risk reward potential to jump aboard a trending market as it resumes its movement after a brief pause or consolidation.
Below is an example of just how powerful trading the inside bar pattern can be in a trending market such as the S&P 500 and is exactly what you should be looking for when trading such patterns.
One way to help you determine the trend is to use moving averages. My go-to on the daily chart is the 21 period exponential moving average.
When price action tends to stay above the exponential moving average, it signals that price is in a general UPTREND. If price action tends to stay below the exponential moving average, then it indicates that it is in a DOWNTREND.
Why does size matter? Well, the size of the inside bar itself doesn’t matter so much, but the size of the inside bar relative to the mother bar is vital.
In my experience, the smaller the inside bar is relative to the mother bar, the greater your chances are of experiencing a profitable setup. The tighter the consolidation, the greater the volatility in the following breakout. Of course, with trading, it doesn’t always happen this way.
Ideally, we want the inside bar to be at least 0.35 ratio in size when compared to the mother bar.
Further improve the Inside Bar Strategy
Using stop entry orders to confirm continuation
A stop entry order is a pending order which allows you to place an order below or above the current market price, depending on which direction you’re trading. If you’re trading long, you would place a stop entry order above the market price, then, if price does continue upwards an order will be placed. If you are short, a stop entry order is placed below market price, then, if price continues downwards an order will be placed.
A stop entry order is a great way to enter a trade when trading an inside bar strategy as it adds extra confirmation that your trading plan has momentum behind it.Tweet
Stop entry orders give you the power to enter a trade with confirmation that your trading plan does have momentum behind it. When you enter the market with a stop entry order, the market moves into your order on momentum that is in-line with the direction you want to trade. This has the added advantage that price is already moving in the direction that you are trading and more often than not will result in an increase in winning trades.
Although it doesn’t “guarantee” that the trade will continue in your favour, you are no doubt shifting the odds in your favour.
Remember that stop entry orders allow you to ‘let the market come to you’ by only entering if the market moves in the direction to the price of your choosing. You have to be prepared to miss the trade, but as we discussed above, the advantages of having momentum on your side to confirm the continuation of the trend shouldn’t be sneezed at.
The inside bar pattern can be profitable when traded correctly. However, in order to increase profits and shift the odds in your favour the following rules should form part of a traders strategy:
- Switch to the daily or 4-hourly charts when trading Inside Bars
- Trade with the general trend of the market. Using an indicator such as the 21 period EMA can help in identifying such trend
- The smaller the range of the Inside Bar relative to the Mother Candle the better. Yes, size really does matter!
- Using a stop entry order can help filter out false breakouts and improve profits
Using an Inside Bar indicator that you can download and use for FREE can assist you in quickly finding such patterns on your charts.
There’s no doubt that Inside Bars can be a profitable way to trade the Forex market, but only if you trade them correctly. If you keep in mind my top three points discussed above and make them part of your trading plan I am confident you will improve your trading when it comes to Inside Bars.
Do you currently trade inside bars? Do you have another rule that forms part of your trading plan?
Leave your question or comment below. I look forward to hearing from you.