The Inside Bar Trading Strategy Guide

An inside bar can be part of an extremely effective price action strategy. However, the effectiveness of the inside bar is highly dependent on the market context. In other words, the inside bar by itself is not a working trading setup.

We need to see additional factors that tell us that the potential profit is worth the corresponding risk. And that's not always easy, because you have to consider several components at once.

By the time you finish reading this article, you'll have a firm grasp on how to identify favorable trading setups on the inside bar and benefit from them.

What Is an Inside Bar?

As the name itself suggests, an inside bar is a candle on a chart that forms inside the range of a previous candle. It means that there is less volatility in the market.

This pattern appears during a strong trend and represents a period of consolidation, which can be clearly seen in the lower time frame. That's why trading this pattern can be profitable - you trade in the trend and open a position upon a breakout of the range.

The previous candle should fully absorb the inside bar. Keep in mind that we're talking about the entire range of the candle from high to low, including its shadows.

As shown in the figure above, the engulfing candle is also called the mother candle. A bearish mother candle is part of a downtrend, while a bullish inner bar candle represents a slight consolidation.

There are different variations of the inside bar:

• Inside bar with a small range
• Iinside bar with a large range
• Inside bar with a small body and large shadows
• Multiple inside bars

A lot of inside bars are a powerful pattern that tells us about a long period of indecision and low volatility. This is a sure sign that there will soon be a surge of volatility in the market and we will see a strong price movement:
 

The inside bar works best in the higher time frames.

Inside bars work best in daily charts because here you won't see the market noise that you always see in lower time frames. The daily chart serves as a natural filter, and there you will find the best price action patterns that will increase your chances of making a profit.

In the daily time frame, the inside bar is not as common, so worthwhile trading patterns will be more obvious. If you look at the hourly chart, you will probably find several inside bars in one day, whereas on the daily chart, you can only find one inside bar in an entire day. Since this pattern was formed throughout the day, more traders will be involved in this formation.

The color of the inside bar does not matter. When trading this pattern, it makes no difference whether the inside bar is bullish or bearish. If the market is in an uptrend and the inside bar is formed inside a large bullish candle, it does not matter if the inside bar is bullish or bearish. The same is true when trading a bearish pattern.

How to Trade the Inside Bar?

The best place to enter the market by the inside bar is to enter on the break of the mother candle in the direction of the trend. To do this, we place a stop order on the boundary of the mother candle.

You can also enter the market on the breakout of the internal bar, but then the probability of a false breakout increases.

Placing Stop Loss

There are two options for setting a Stop Loss:

1. Place a Stop Loss just below the minimum of the mother candle. This approach is safer, but we will not get the best risk/reward ratio.
2. Place the Stop Loss below the low of the inside bar. This approach will not only give us the best risk/reward ratio, but will also be a safe enough place to place the Stop Loss.

Fixing Profits

• If we are trading in consolidation, it is best to take profits at the opposite end of the range;
• If we are trading in a trend, you can use a Trailing Stop and move your Stop Loss behind the price when the market is moving in your favor. For example, we can move the Stop Loss at 20MA.

We should always aim for a risk/reward ratio of at least 1:2, so the size of the inside bar relative to the mother candle is important. The smaller the size of the inside bar, the better the risk/reward we will get.

As practice shows, the smaller the size of the inside bar in relation to the mother candle, the better the chance of getting a profitable trading setup. Why is this so? Recall that the inside bar represents a consolidation after a strong trend. We make a profit since we trade on the consolidation breakout. Consequently, the denser the consolidation, the more volatile its subsequent breakout will be.

It is also better to choose inside bars, which are formed near the upper or lower range of the parent candle.

Combination of the Inside Bar and the Pin Bar

What to do when an inside bar appears on the chart followed immediately by a pin bar?

The inside bar is a trend continuation pattern. However, to trade on this pattern, you need to pay attention to the nearest key levels. We are not going to open a position on the inside bar near the levels as there is a high probability of the market reversing and not continuing its movement.

This formation can be regarded as a false breakout of the inside bar. More often than not, a false breakout causes the market to change its direction. For example, a false breakout of a key resistance level often results in a steady price decrease. The combination of the inside bar and the pin bar does not differ.

The image above shows how all the factors in this model work together. We see the key level, then the inside bar and the pin bar appear. The inside bar here represents a stalemate between buyers and sellers. The subsequent bullish pin bar makes a false breakout of the inside bar and support level. This is followed by a reversal.

Moving the Stop Loss on the Inside Bar

How often have you closed your trade at a fixed take profit only to see the price move further in your direction by an additional 50-200 pips? To be honest, getting a loss is not as frustrating as closing your trade at the most inopportune time. Besides, it also greatly affects our nervous system, which can make us win back the lost profit. I'm sure you know the unfortunate end of all this yourself.

So, how do you move the Stop Loss to the profit zone?

In this case, the answer is simple: you must be guided by the logic of each pattern. After all, each pattern is traded by certain rules, in each candle something is sure to break out, and this knowledge will be enough to determine the location for a Stop Loss.

Tips On Trading the Inside Bar

As previously noted, the inside bar pattern has several features that must be considered when using its signals:

• It can give both reversal and confirming the continuation of the trend signals;
• In the structure of the model there is necessarily a price break (GAP) between the mother and the signal candles;
• The figure reflects the processes of market consolidation, during which the players determine the further price movement;
• In a real pattern, the price direction in the main and signal bars is always differently directed (candles have different colors);
• The pattern signal is in no way related to the direction of the main and signal bars (mother and signal candlesticks), the main thing is that they must be differently directed (candlesticks have different colors);
• If the size of the main bar is too large (5 and more times greater than the signal bar), it levels out any signal of the model and it means you should refrain from trading.

Taking into consideration the aforementioned features, traders who have just studied the inside bar pattern can be recommended:

• Follow only the signals of the pattern, which indicate the continuation of the trend;
• Check the reliability of the signal before opening a position by any of the most convenient means of technical analysis (indicators, trend lines, volumes);
• Trade in 4-hour and higher time frames;
• Use the indicator of the inside bar;
• Open a trade only on a signal of a pattern located on the level of support or resistance, in case of a breakout of these levels which confirms the continuation of a trend;
• Enter the market during a strong trend, when prices pull back to the mean values.

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