Inside Bar Trading Strategies
This inside bar tutorial covers a classic and often misunderstood trading setup – the inside bar. An inside bar/inside candle/inside day (hereafter referred to as inside bar) can be a trend continuation or reversal formation and is defined by a bar that forms completely within the price range of the preceding bar.
Inside bars show that the associated trading range is consolidating and winding ever tighter, as time progresses, and likewise point to an equilibrium between the buyers and sellers for a given period of time. They are sometimes found in areas where trend lines or moving averages converge.
Paul Tudor Jones once said that when you see a range expansion, the market is sending a very loud, clear signal that it is getting ready to move in the direction of that expansion. Inside bar breakouts are an example of a range expansion scenario.
My preference with regards to inside bar trading strategies is to see these bars in clear trending markets (with less associated noise) and placed at areas where the order flow “could” be in place – we never know for sure but we can work on probabilities.
As a guide – the areas we look for these inside bars include:
- Support and resistance zones/levels including floor trader pivots.
- Preceding a trend line breakout
- After a trend line breakout
- General price action pattern breakouts i.e. double tops and bottoms.
- Round numbers
- Technical confluence areas.
- After a reversal bar
Factors that make me pass on a trade setup include (but are no limited to):
- Not taking an inside bar which represents “dead market hours”. I know that a 4 hour period in the Asian session has a high probability of printing an inside bar but will not put too much emphasis on it. Give me the same bar during the London session and I am interested. The same would apply for a daily inside bar printed during the Christmas holiday period.
When and where should an inside bar be traded?
This is very subjective and the individual trader’s system will help determine the optimal entry and exit points; broadly speaking though, traders are looking for volatility to increase; after the previous candle high or low has been penetrated and if this breakout area is technically significant in other respects, as per the criteria listed above, the setup is more interesting.
If we get an inside bar at one of the aforementioned areas the high and low of the bar will, highly likely, have significant order flow interest. This can give a real momentum surge once penetrated and can help the breakout gain legs.
An inside bar trading strategy worthy of investigation is to trade these bars at areas where major order flow is highly likely in place.
So the inside bars can be reversal or continuation triggers. My preference as a price action forex trader is to see these on a daily timeframe as this gives more time for the order flow to build. People tighten stop losses, place buy/sell stops etc and these can all provide the strong underlying momentum I look for.
Identifying Inside Bars
The following chart shows an example of an inside bar. The next bar to open would need to move above or below it in order to trigger a buy/sell.
Multiple inside day variant
Multiple inside bars can provide excellent breakout trade opportunities; as can be seen on this GBP/JPY chart above. On this example price had stayed within the previous days range, for two consecutive days in a row, before finally breaking out. When the breakout came price made a decisive move higher with little in the way of a retrace.
Multiple inside days are often synonymous with triangle patterns on the lower time frame. This 1 hour chart captures the same price action as the daily chart above.
- Advanced practitioners can identify an inside day and move to the lower timeframe for a highly leveraged entry with a smaller stop loss – these will no doubt give more losers but could potentially see a high risk reward winner if the break is strong. This is sometimes referred to as “scalping the breakout”.
- These inside day candles can sometimes be incorporated with entries utilising opening range breakouts. The ACD trading method or perhaps a “London open” breakout method are examples that spring to mind.
- Narrow ranges can sometimes be followed by strong volatility. NR4 or higher (narrowest range in 4 candles) are often worth looking out for.
- False breakouts in one direction sometimes give an indication that the other side of the inside bar could be the “real deal”. This is by no means a reason to trade all failed breakouts in the opposite direction but can be another relevant element when doing the top down analysis. Some of the best market information comes from initial trade ideas which don’t work out as anticipated.
The end result of these lower timeframe entries will not always be better than the simple entry method on the higher timeframe; they are however another useful trade entry strategy which can be deployed when appropriate. I hope you enjoyed this inside bar tutorial.
Related searches: Volatility breakout, range breakout, consolidation range.