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How to Use Inside Bar Trading Strategy

Inside bar trading offers ideal stop-loss positions and helps identify strong breakout levels. You can create a successful risk management strategy and place successful trading orders with it. Our article will discuss the Inside Bar trading strategy and how to identify ideal price levels with the same.

What is Inside Bar trading?

Inside Bar trading involves a series of several bars occurring in a range (either upwards or downwards) which allow you to identify potential breakout, reversal or continuation signals. Every succeeding bar in this pattern has a higher low and lower high than the preceding bar. It has at least two candlesticks in the pattern: the Inside Bar and the Mother Bar.

  • A Bearish Inside Bar occurs when the Mother Bar is a large red (bearish) candlestick followed by a short green (bullish) candlestick. This indicates a bearish continuation pattern and signals traders to place short orders. However, if the short green candlestick appears after a prolonged series of red candlesticks, it may indicate a bullish market reversal and signal you to place long orders.
  • A Bullish Inside Bar occurs when the Mother Bar is a large green candlestick followed by a short red candlestick. This indicates a bullish continuation pattern in the market and signals traders to place long orders. However, if the short red candlestick appears after a prolonged series of green candlesticks, it may indicate a bearish market reversal and signal them to place short orders.
How to Use Inside Bar Trading Strategy Graphic

Identifying an Inside Bar

The Inside Bar can be identified in two easy steps – 1. Find the existing trend using the technical indicators or price action analysis.
2. Locate a candlestick that is completely engulfed by the preceding candle’s high and low. This will be the Inside Bar. If the preceding bar is a red candlestick, the Inside Bar will be a green candlestick, and if the preceding bar is a green candlestick., the Inside Bar will be a red candlestick.

Top characteristics of an Inside Bar strategy

Time frame

The Inside Bar pattern works best on a daily time frame. Any timeframe shorter than this does not provide accurate signals as the prices are influenced by noise, and the pattern may occur several times without any solid market signal. On the other hand, any timeframe longer than this may be too spread out for the Inside Bar pattern to provide ideal market continuation or reversal signals.

Trending market

The Inside Bar pattern works best when the market is currently trending. The stronger the trend, the easier it is for the pattern to provide a reliable signal. If the market is not showing any certain trend, the Inside Bar pattern will not be able to form due to the uncertain market movement.

Size

The size of the Inside Bar with respect to the mother Bar depicts how accurate the bar setup signal will be. The smaller the size of the Inside Bar compared to the Mother Bar, the higher the chance of the market signals being accurate and vice versa. Ideally, the Inside Bar should form within the Mother Bar’s upper or lower half.

Breakouts

An Inside Bar formation right after a price breakout in the current trend provides the most accurate signals. This is because it indicates that the current trend is going to end, and the market will reverse. This enables traders to place short orders during an existing uptrend and long orders during an existing downtrend.

How to trade with the Inside Bar pattern

1. Identify potential breakout level

In most cases, the development of an Inside Bar indicates a market consolidation which means that the existing trend can reverse in the near future. Identify if there is going to be an upward breakout during an existing bearish market momentum or a downtrend breakout during an existing bullish market momentum. If the currency pair prices diverge from the existing trend before the price consolidates, a reverse price breakout is confirmed.

2. Consider trading with medium-term charts

The Inside Bar pattern provides the most reliable signals when traded on a medium-term chart like a daily chart. This is recommended because, on a medium-term chart, Inside Bars have a larger sample size and occur only at the actual levels where the market can actually reverse. Additionally, the Inside Bar pattern provides even more accurate signals when clubbed with a technical indicator like RSI.

3. Open a position based on Inside Bar levels

Once you have identified the Inside Bar, you can open a forex position in the continued or reversing market. Open a position with a market trend continuation expectation when the currency pair price is still trading between the Mother Bar’s high and low-price levels as the market is expected to continue. However, you can also place an entry order just above the uppermost level of the Inside Bar with an expectation of market reversal. The more the difference between the Mother Bar and Inside Bar, the higher the chance of the market reversing and vice versa.

4. Place a stop-loss order

The last step to using the Inside Bar pattern is to always place a stop-loss order. Since Inside Bars can either indicate a breakout or continuation signal, there is no guarantee that the market will move in the direction of your analysis/prediction. Hence, stop-loss orders help in minimising trade risk.

  • Place the stop loss order below the lower price level of the Inside Bar when placing a long order.
  • Place the stop loss order above the higher price level of the Inside Bar when placing a short order.

Trade with the Inside Bar strategy to ace the forex market

Trading with the Inside Bar strategy can help you identify strong market reversal or continuation signals. Our forex trading platform allows you to experiment with different strategies through a demo account before you open a live account and deal with actual money. Get started with Blueberry Markets today. Sign up for a live trading account or try a risk-free demo account.

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