An Inside Bar develops during a strong downtrend when the trading range is completely within the high and low of the previous bar. Keep in mind that you can inside bar forex make almost any line fit some sort of trend or support/resistance level. We see this on longer timeframes when price forms a “box,” or a tight range.
How to Enter an Inside Bar Setup
The breakout occurs below the low of the ‘preceding bar’ thus triggering a short entry into the market. Had this breakout occurred above the high of the ‘preceding bar’ then this can signal a long (buy) entry indicating a potential reversal in trend. Trading against the trend carries more risk which leads to greater caution taken by the trader. The inside bar forex trading strategy is a ‘flashing light’, a major signal to the trader that reversal or continuation is about to occur.
Spotting the Inside Bar in Forex Trading
Please note ThinkMarkets does not provide CFD services to residents of the US. Nial Fuller is a professional trader, author & coach who is considered ‘The Authority’ on Price Action Trading. He has taught over 25,000 students via his Price Action Trading Course since 2008. In order to confirm the Inside Day / Narrow Range of the last 4 days ( ID NR4 ) pattern, you will need to have and Inside Day Candle, which is also the narrowest Range Candle within the last 4 days. The first candle is also known as a mother bar, and the second is called the baby bar.
How to Draw Support and Resistance Levels Correctly
The visual representation of this two-candle pattern resembles a smaller candle inside a larger candle. Check out the diagram below for an example of what an inside bar pattern looks like. We added the Relative Strength Index (RSI) indicator as our confluence trading tool to see if the price continues with the trend, reverses, or stays in range mode. However, if you have two bars with the same high and low, it’s generally not considered an inside bar by most traders. Since price volatility has subsided and the price stayed completely within the range of the previous bar, either buying pressure has increased or selling pressure has decreased.
How to trade the inside bar setup
- They often provide a low-risk place to enter a trade or a logical exit point.
- The most common approach is to place a buy stop order just above the high of the inside bar for a bullish breakout or a sell stop order just below the low of the inside bar for a bearish breakout.
- The best place to enter an inside bar is on a break of the mother bar high or low in the direction of the trend.
The relative dimensions of the Inside Bar compared to the Mother Bar can greatly influence the precision of the trading signal. A diminutive Inside Bar, nestled snugly within the confines of the Mother Bar, often suggests a stronger and more reliable market signal. The ideal scenario is when the Inside Bar is situated within either the top or bottom half of the Mother Bar’s range, as this can be indicative of a more potent and actionable trading setup. But that’s okay because by the time you finish this lesson you will have a firm grasp of not only how to identify favorable inside bar setups, but how to trade them for a profit.
This pattern suggests a period of market consolidation or indecision, as traders are unsure about the next market direction. The blue circle on the price graph above shows an inside bar candlestick pattern. See that the highest and the lowest points of the small bullish candle are fully contained within the previous bearish candle. The black horizontal lines on the image define the inside bar range – the high and the low of the pattern. When you spot a breakout through one of these two levels, then that would give you a signal in the direction of the breakout. In our case the price action breaks the inside range in bullish direction.
Therefore, stop-loss orders are essential for mitigating trading risks. 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 course on how to trade price action inside bars as well as several other setups I use when trading my own account. I’m going to finish this lesson by discussing why the relative size of the inside bar matters and what it has to do with the entry and stop loss placement we just discussed. I’ll give you a hint…it has to do with profit targets and risk to reward ratios.
On the other hand, larger inside bars tend to represent a more significant pause in the market and can lead to more substantial exchange rate movements once a breakout occurs. Analyzing the size of the two candles that form the inside bar pattern can also help currency traders better gauge the strength of potential breakouts. One of the primary strategies for trading the inside bar pattern involves waiting for a breakout.
So, a buying signal is given once the third candle closes above the previous bar. Additionally, the volume provides another confirmation that buying pressure is building up. Stop loss placement is typically at the opposite end of the mother bar, or it can be placed near the mother bar halfway point (50% level), typically if the mother bar is larger than average. Stay tuned for future posts, where I share actual Inside Bar trading strategies and test each one to show you what works and what doesn’t. The key is to be able to understand which levels are most likely to hold and which ones are just random lines on a chart. It will take you through the process of identifying the most significant levels on any chart.
These questions will help you determine the potential direction of the breakout and the overall profitability of the trade. Forex trading is an exciting and potentially profitable venture for those who are willing to put in the time and effort to learn the intricacies of the market. One popular trading strategy that many traders swear by is the inside bar strategy. This strategy is based on a simple yet powerful principle that can help traders identify potential high-probability trade setups. In this article, we will delve into the details of the inside bar strategy and guide you through the steps to master this powerful technique. This sort of bar setup means that the high of the current candle is lower than the high of the previous candle, and the low of the current candle is higher than the low of the previous candle.
After price has trended up (or down) for an extended period, the pause in price movement (represented by the inside bar) precedes a reversal of the trend. Therefore, the inside bar is looked at for a short-term trade (or swing trading) in the counter-trend direction with the goal of holding the trade for less than 10 bars. The next stop placement is typically used on inside bars with larger mother bars.
It’s like not looking in your rear view mirrors before changing lanes on the highway. You need to know what previous price action has done in order to put the odds in your favor. This is true for any type of price action setup, not just inside bars. Let’s look at our last example where the relative size of the price action inside bar would negate the trade setup based on our profit target. We have an inside bar on the daily chart in a strong downtrend…everything looks good. This candlestick chart pattern represents a temporary consolidation or pause in the forex market that suggests indecision prevails over the future direction of the market.
During the initial decline, the price action creates an inside bar candle formation on the chart. The next candle which comes after the inside bar breaks the upper level of the range. As you see, the price begins to reverse afterwards, and within the next two bars, the price decrease leads to a break of the lower level of the range. This confirms the Hikkake pattern on the chart, and with that, we should get ready to initiate a trade to the short side. This ID NR4 trading pattern is quite a prolific and reliable setup that astute traders can take advantage of.
The image demonstrates an inside day with narrow range a.k.a the ID-NR4 Pattern. The proper location of your stop loss is slightly beyond the inside candle’s top, or bottom, depending on the direction of the break. In other words, if the inside range gets broken upwards, you can buy the Forex pair and place a stop loss order right below the lower candlewick of the inside candle. It is consolidating because the bulls cannot manage to create a higher high and at the same time the bears fail to create a lower low. As such, there is not sufficient buying or selling pressure to break the previous bar’s high or low.
Of critical importance here, is that the inside bar formed at a key chart level, indicating the market was hesitating and “unsure” if it wanted to move any higher. We can see a decent downside move occurred as price broke down past the inside bar’s mother bar low.. We can also see a good example of an inside bar that acted as a reversal or turning point signal. What is most important is that the inside bar trading setup must adhere to pre-defined rules that the trader sets up per his own trading plan. We will discuss some examples of how a trader can approach setting up a trade when they see this pattern on their chart.
Finally, remember to use appropriate risk and money management techniques. The critical point here is the third candlestick that rises above the second candle and indicates that the price is likely to increase. To confirm that, we used a basic moving average indicator, and, as seen in the chart, the crossover occurs precisely at the formation of the mother candle (the first candle). Even though the pattern is known as having a structure with one large bullish or bearish first candle and a second smaller candle, it could have many other chart formations. For example, the inside bar pattern could also be formed with a large first candle and a second tiny Doji candle.
The first candle has a tall body, sometimes very large wicks, and is called the mother bar. The second candle has a small body, sometimes having low wicks, and is called the baby candle. The inside bar formation is completed when the second candle closes within the body of the mother candle. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey.