Some traders like to use multiple moving averages to define a trend. They usually use 2-3 moving averages and when they are in order from shortest to longest period, that call that a valid trend. This is the ideal scenario for trading a bullish inside bar setup as the market has gained a fresh set of buyers who are ready to push prices higher. Of course the opposite holds true for trading a bearish inside bar after a break of consolidation.
According to the second definition, both the open and close of the Inside Bar are within the range of the previous bar’s open and close. Third, a genuine dilemma exists in deciding which reference to use in the inside bar setup—the mother bar or the inside bar candle. Depending on your trading preference, your position sizing can vary significantly.
What Is The Best Price Action Trading Strategy?
Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardising ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. This inside bar strategy has been made by the combination of inside bar breakout and support/resistance breakout. This is a pure price action strategy, and it has a higher winning rate.
Countertrend Inside Bars
Futures, options, and forex are leveraged instruments, and carry a high degree of risk. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness, and usefulness of the information. Inside bars on SPY behave differently than those on QQQ, individual stocks, or futures. Always check the specific data for your chosen day trading instrument.
- The inside bar is a two bar candlestick pattern, which indicates price consolidation.
- Furthermore, the inside bar may appear inside another chart pattern formation, such as the three inside-up pattern, where the first two candles are, in fact, inside bars.
- Price action becomes “compressed” into a tighter range and at some point, it has to break out and resume normal volatility.
- We shall explore the meaning, formation, and strategy with examples of charts for better understanding.
Trading the Inside Bar Pattern: A Comprehensive Guide
As you see in this example, the EUR/USD decreases afterwards making this Hikkake trade a profitable deal. We will discuss the structure of the inside bar setup and the psychology behind it. And finally we will go through a few of inside bar variations that you should become familiar with.
- An inside bar is a candlestick pattern where the high and low of a candlestick are within the high and low range of the preceding candlestick.
- This means more traders were actively involved in its formation, which as a result equals higher capital flows.
- Now, don’t worry about how to set your stop loss or trade management because we’ll cover that later.
- Instead, it would be best to interpret the pattern differently on the market scenario and decide the next price direction.
Example scanners based on The Inside and Outside Bars
The prior bar, the bar before the inside bar, is often referred to as the “mother bar”. You will sometimes see an inside bar referred to as an “ib” and its mother bar referred to as an “mb”.
In other words, a pin bar that’s within the range of an outside bar or mother bar. 1) The pin bar + inside bar combo, consists of a pin bar that consumes a small inside bar toward the nose of the pin (the pin bar’s real body). The inside bar as an inside bar trading strategy entry signal does not offer the trader an edge over the market in most scenarios, however the inside bar used for reading the price action story can be very useful.
It is a tool to control our risk and time our entries in a trending market. Instead, I use the Price Action Time-frame Index (PATI) to find time-frames that are tradeable. It finds the smallest time-frame that is tradeable for a price action trader. As long as you are trading above the minimum tradeable time-frame (MTT), price action analysis is possible.
But note that the MTT changes over time as market price action changes. Read on for a simple inside bar day trading strategy with examples from the YM futures market. All you need is a simple moving average and a bar pattern called inside bar. When the price of a security is below the moving average, an inside bar formation at the resistance of the moving average indicates a sign of more downtrend.
Chart Patterns
There are five things you want to look for when evaluating any inside bar pattern. It’s mostly due to the fact that this particular strategy requires a strong trend in a market that has room to run. No pattern is the holy grail of trading, and the inside bar pattern, like many other classical chart patterns, has strengths and weaknesses.
The price action might reverse direction and quite possibly could break the range of the pattern from the opposite side. This will trigger your stop loss, because it should be located on that side of the range. Therefore, you will be stopped out of the position with a small loss. If the price breaks below the low of the Inside Bar, it signals that sellers are regaining control, making it likely for the downtrend to continue.
The information we gather can be very different depending on where in the market the inside bar forms. For the inside bar to be structurally correct we need to see the range of the candle be completely inside that of the housing candle. Matching lows and highs are acceptable, however the inside bars range must not be outside of the housing candle by even 1 pip.
Two Types of Confirmation Signal
Nial Fuller is a Professional Trader & Author who is considered ‘The Authority’ on Price Action Trading. He has a monthly readership of 250,000+ traders and has taught over 30,000+ students since 2008. Do your research before investing your funds in any financial asset or presented product or event. On the left is the housing candle, and on the right is the inside bar.
Whilst there are many price action indicators including inside bar indicators, when looking for inside bar trades an indicator will not save you time. The charts below show the YM futures market using 4-minute candlesticks. These rules attempt to capture the first low-risk pullback in a new trend using an inside bar. We define the trend with the help of a 21-period simple moving average (SMA). For those who prefer automation, this indicator also supports algorithmic trading approaches.
There are 2 basic types of Inside Bars that traders use to enter trades. The inside bar setup is capable of producing consistent profits, but only to the traders who mind the five characteristics discussed above. In my experience, the smaller the inside bar is relative to the mother bar, the greater your chances are of experiencing a profitable trade setup. Ideally, we want to see the inside bar form within the upper or lower half of the mother bar. It means always keeping your risk to no more than half the potential reward. So if your take profit is 200 pips, your stop loss can be no more than 100 pips away from your entry price.
