I think inside bar trading strategy is one of the most neglected price action setups in the world of Forex trading.
I’m not sure why inside bars are overlooked by most price action traders ?
Maybe they don’t have the appeal of pin bars and engulfing candles, or it could be because it’s a little more complicated to understand than other price action signals.
Nonetheless inside bars, if traded correctly, can be a great way to make money from the Forex market. Either by trading them on their own or as a method of scaling into trades which I’ll talk more about later.
The purpose of today’s article is to firstly give you a bit of background as to what inside bars are and what they mean, whilst later on I’ll show you the two types of inside bar setup you can trade and which setup you should avoid.
What Are Inside Bars ?
Inside bars are either one or more candlesticks which are contained within the range of one candle, this candlestick is usually referred to as the mother candle.
The high and low of the mother candle are the boundaries to which the inside bar or bars must be contained in, in other words if the high or low of any of the inside bars exceed the high’s or low’s of the mother candle it’s not considered an inside bar setup anymore.
Here’s we have a single inside bar setup.
This setup is where there are only two candles, the mother candle and the inside bar, notice how the whole inside candle is contained within the range of mother candle, if this inside candle had a high or low which broke the high or low of the mother candle it would not be an inside bar setup, there has to be at least one candlestick contained within the range of the mother candle for this to be considered an inside bar setup.
A lot of times you’ll notice their can be multiple candlesticks contained within the range of a large mother bar candle, all of these candlesticks are considered inside bars, as long as no candles break the range ( highs and lows ) of the initial mother candle, even if one of the inside candles break the range of another inside candles seen previously they are all still part of the larger inside bar setup as long as mother candle range does not get breached.
This is an example of a bearish inside bar setup where there are multiple candles contained with the range of the mother candle. The bearish candle with an up arrow pointing to it, is the first candle which breaks the low of the mother candle, if you were trading this setup you would have been entered into your trade at this point.
What Do Inside Bars Tell Us About The Market ?
Inside bars show us that currently the market is in a period of indecision, if you think about what different candlesticks mean then you’ll know that a candle which has its body in the middle of the candle with relatively equal highs and lows on either side represents indecision in the market, this is what inside bars essentially are, indecision candlesticks only, instead of finding one on its own we are looking at multiple indecision candlesticks.
Usually you will see inside bars soon after the market has made large movement in one direction, this is due to two sets of traders taking different courses of action in the market.
If we see the market move up really quickly it would make sense that the traders who have made money off of the movement will want to take some profits off their trades, at the same time there will be traders who have only just entered the market after seeing the large movement up, these traders will not be thinking about taking profits because they have only just entered the market.
These two competing actions, one set of traders taking profits vs one set of traders buying is what creates the inside bars.
How To Trade Inside Bars
Inside bars can be traded in two ways, one way is a high probability setup whereas the other is a low probability setup.
The high probability way of trading inside bars is when they’re used as a continuation signal in an already existing trend.
In the image above I’ve given you an example of a recent inside bar setup which you could have traded on the daily chart of EUR/USD
The way you would’ve traded this setup is by first determining which direction the markets moving in, so in the example above the markets clearly moving lower, this means we only want to be using inside bars for sell trades.
Now we need to enter the trade, the best way to this is by using a pending order placed at the low of the mother candle, if we place it at the lows of the inside candles we run the risk the market making a sudden spike downwards then moving back up, which would trigger our sell order in the process and potentially make us lose money.
With our pending order placed all we need to do now is wait for the market to break the low of the mother candle.
Our stop-loss will initially be placed above the high of the mother candle, if this was a buy setup it would be at the low, once the market has broken the low of the mother candle and triggered your pending order you’ll need to move the stop-loss from the high of the mother candle to the highs of the inside candles, this way, as the market moves down your decreasing the risk on your trade.
Inside Bars As Reversal Signal
Trading inside bars as reversal setups at support and resistance usually do not result in successful trades.
This is mainly down to what the inside bars represent in the market.
Inside candles show that there’s indecision in the market, we don’t want to see indecision at places where the market could reverse, we want to see confirmation. Seeing an inside bar at a support and resistance level does not give us a good idea as to which direction the market is likely to break, all its telling us is traders are undecided as to which way the market should go.
It would be different if we were seeing an engulfing candle at a support or resistance level because this is telling us that someone is selling, we can make a decent trading decision based on that observation, if the market is producing inside bars we cannot make a good judgment as to where the market is going to go because all we are seeing is indecision.
Scaling Into Trades Using Inside Bars
The best way I think inside bars should be used is as a method of scaling into trading positions.
Scaling in is a common method of making more money from shorter movements in the market. Many different strategies can be produced when thinking of scaling into trades, they allow much more freedom when trading and have the added benefit of removing the pressure of losing money. for a full guide on how to scale in safely check this article.
The image above is a recent example of how you could have used inside bars as a method of scaling into trades.
There are 3 green rectangles on the chart, each one of these represent an opportunity to scale into a position using inside bars, this small down move lasted 31 days, had you scaled into each one of these inside bar setups using increasingly higher leverage on each one you would have been able to make quite substantial amounts of money.
My goal with this article was to show you how trading inside bars can not only be very simple, but also very profitable if you know what you’re doing. I think in the grand scheme of things you should learn how to trade inside bars after you have mastered how to trade pin bars and engulfing candles. Although simple to trade, trading inside bars successfully does require some market experience, it will take a while for you to fully grasp what they look like on your charts and a little longer to learn the best times to trade them.