Inside bars are a high-probability trading strategy that usually provides traders with a good risk reward ratio since they typically require smaller stop losses than other setups. It’s more profitable to trade inside bars on the daily chart time frame in strong trending markets, inside bars are best in trending markets as breakout plays in the direction of the trend. Let’s discuss some facts about inside bar trading and go over some examples of how to trade them.
What is an inside bar?
Inside Bar is a candle that is completely inside the previous candles high and low.This is not just referring to the body, but the wicks as well being inside the previous candles price action.
Example below we have two coiling inside bars (smaller and smaller inside bars) that are within the range of the preceding bar which we call the “mother bar”. The example below shows inside bars that led to a breakout play in an up-trending market.
What does an inside bar mean?
The inside bar is a ‘flashing light’, a major signal to the trader that reversal or continuation is about to occur.
An inside bar indicates a time of indecision or consolidation. Inside bars typically occur as a market consolidates after making a large directional move, they can also occur at turning points in a market and at key decision points like major support/resistance levels.
They often provide a low-risk place to enter a trade or a logical exit point. Note in the image below we see an example of an inside bar that formed as a continuation signal and then one that formed as a turning point signal. While they can be used in both scenarios, inside bars as continuation signals are more reliable and easier for beginning traders to learn. Turning-point inside bar signals are better left for more advanced forex price action traders.
The best time use the inside bar signal
The most logical time to use an inside bar is when a strong trend is in progress or the market has clearly been moving in one direction and then decides to pause for a short time. If we play the break out, our stop loss can be defined by placing it below the half way point of the mother candle, or for the more conservative trader, below the mother bar itself. This would mean that the market must break a 3 bar low to take us out of the trade.
Inside bars can be used when trading a trend on the 240 minute charts or the daily Forex charts, but I personally prefer to trade inside bars on the daily charts and I recommend all beginning traders should stick to the daily charts until they have fully mastered and found consistent success with the inside bar setup on that time frame.
Note on the daily GBP/USD chart below, we can see two inside bar setups that occurred with the recent near-term market momentum. As they broke out they both led to large directional moves and provided for an excellent risk reward ratio.