Price action — a strategy that every beginner and even experienced trader likes. Although there exists a large number of methods, price action is the king of them all.
Many market participants also use indicators to trade the market, and that’s okay, but they don’t always work. Sometimes they are lagging and give late entry signals.
Also, the traders are dependent only on the indicators to give the signal and then follow blindly. This, in terms, does not allow a trader to look into the major and important aspects of the overall market movement.
Now over this, price action has many things in it to learn and is not easy. Among one of the many patterns, we have an Inside Bar. It has different price patterns and candlestick analysis that a trader must learn, practice and master.
Understanding of the Inside Bar pattern
It is probably a favorite pattern for a large crowd of traders, which gives both continuous and reversal signals and combines two candles characteristics to validate itself:
- Preceding candle
- Current candle
The preceding candle is more significant than the current one. The Inside Bar can sometimes be overwhelming as it frequently occurs on the lower time frame in a less volatile market. But it gives a very accurate trade setup once appropriately identified.
Trading the Inside Bar using price action
In this section, you will understand how and when it is better to trade the setup. The first thing to do is identify the pattern on the chart following by placing your trade and understanding how to enter, where to take profit, and stop loss.
Identifying the Inside Bar in continuation and reversal
Continuous or trending trading using the Inside Bar is also considered breakout trading. You need to first look into the overall market trend.
- If the price is making a higher high, higher low, it is an uptrend.
- If the price is making a lower high and lower low, the market is in a downtrend.
Trading Inside Bars in a trending/continuous market
Breakouts can be in both the direction either moving up or down. Once you know the trend, you will need to look for a pullback like an example below. As you can see on the GBP/JPY daily time frame, the market started heading up after forming an Inside Bar.
The previous candle high is higher than the new one; also, the new candle low is higher than the previous low.
Now looking at the bearish example, you can see in the chart of GBP/JPY in the daily time frame making a lower low, lower high. This signifies that the market movement is down, and you should be looking to sell the asset.
Once the Inside Bar is formed at the swing high, it confirms the market still needs to follow the trend in this example to move down.
Trading Inside Bars for reversal
Trading reversal using an Inside Bar is almost the same as using it for trading continuation, except here you have to find the candle near a reversal area of confluence.
First, look for dynamic support or resistance and then price patterns on your chart like a double bottom, double top, or any other reversal patterns. Once you see the pattern, you will look for an Inside Bar to ensure the reversal confirmation.
To make it more clear, look at the chart. Here we are using GBP/JPY daily time frame. The price touched dynamic support once and then twice, making a double bottom reversal pattern. While the price was moving up, you can see its price forming an Inside Bar.
Placing your trade
You can put a sell stop or a buy stop while using this pattern as a beginner. The market will fill your order once the price breaks below or above the entry price.
Before even entering a trade, you must decide on your stop loss. While trading this pattern, you will be placing your stop loss in the opposite direction 4-5 pips away from the preceding candle.
Its placement entirely depends on you and the type of trader you are. Typically you may choose to place it at the next daily support or resistance level.
Pros of the trading Inside Bars for reversal:
- Easy to identify
The Inside Bar pattern is easy to find on the chart even if you are a beginner and have less experience in trading. Once you get your hands on this pattern, you can easily trade it.
- Gives opportunity
The Inside Bar pattern is very accurate if you find it at the right time during reversal or trend continuation.
- Reasonable risk to reward
It is something every trader must take time and think of. While trading this pattern, you will have a higher probability of getting a good risk to reward.
Cons of the trading Inside Bars for reversal:
- It can be spotted much easier on the chart
Sometimes, too frequent an occurrence of this candle can be overwhelming and can create confusion.
- It’s hard to identify its reversal or continuous
As already discussed, if the volatility in the market is less, the formation of the candle might be more that creates confusion if it’s a reversal or a continuous signal.
The Inside Bar can be somewhat complicated in terms of definition. Some traders define its validity when either the highs or the lows are equal. At the same time, some market participants believe it is not a correct formation of this pattern.
Inside Bar is best traded in higher time frames like daily and weekly and is suitable for swing trading as it does not have too much significance when used with a lower time frame. Lower time frames can give a lot of false trading setups.
This pattern gives a very significant opportunity, especially when trading reversals. To make it more accurate, you can try looking for it near a support or resistance zone.