Regardless of how you define a trend, spend a lot of time in Forex Tester or using screenshots to look at many different types of trends. Make sure that your method of identifying a trend really does give you an edge. If you trade every single Inside Bar signal, you WILL blow out your account. Price action becomes “compressed” into a tighter range and at some point, it has to break out and resume normal volatility. You don’t need to know why Inside Bars happen, you just have to understand what the price action is telling you.

What’s the Risk to Reward Ratio?

The Inside Bar Candlestick Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy. Sometimes the Inside Bar occurs when there is pressure from sellers and buyers. This shows indecision in the market as both of them were unable to push the price higher or lower. Usually, the presence of the Doji candlestick pattern before the Inside Bar confirms this uncertainty.

  1. However, if you have two bars with the same high and low, it’s generally not considered an inside bar by most traders.
  2. Finally, take profit is placed at the highest level of the last swing price.
  3. takes no responsibility for loss incurred as a result of the content provided inside our Trading Academy.
  4. For exits, savvy traders might implement trailing stops to safeguard gains.
  5. It means always keeping your risk to no more than half the potential reward.

Choppy Price Action

As the Inside Bar has two candles, they can sometimes be more effective than a single candlestick pattern. But as we already mentioned, the best use of the Inside Bar is with other technical analysis and not on its own. As with any trading strategies, there is inside bar trading strategy no one-size-fits-all approach, and the Inside Bar strategy is no exception. It requires adaptation to the market’s changing rhythms and personal trading style. The final and crucial step in leveraging the Inside Bar pattern is to always set a stop-loss order.

Learn more about trading with candlestick patterns

After a few weeks of this exercise, you’ll start to get the hang of it. You can probably make a (weak) case for the line being a support or resistance level. As you can see, there were several large back-and-forth bars before this Inside Bar printed. Just like any other price action pattern, you don’t want to take every Inside Bar signal that comes your way. So if you took a short signal, the stop loss would go above the mother bar.

On the above chart, that’s the takeaway, that each inside bar that printed was then followed by a breakout that continued for at least one bar after. That is with the exception of the final bar, of course, which showed a reversal. The inside bar printed and the low was immediately broken as a bearish trend started to develop. In price action terms the inside bar is closely related, and many traders ignore these formations – or ‘lack of formation’ – and instead wait around for a more actionable signal of some sort.

If using the more aggressive stop loss strategy, this means selecting inside bars that form near the upper or lower range of the mother bar. A favorable risk to reward ratio is needed for any setup taken here at Daily Price Action. This is true whether we’re trading an inside bar, pin bar or wedge breakout. Each and every strategy needs to be accompanied by a favorable risk to reward ratio. First and foremost, the time frame you use to trade inside bars is extremely important.

When you discover an inside bar breakout on the chart, you will most likely want to trade in the direction of the breakout. 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.

We see this on longer timeframes when price forms a “box,” or a tight range. Finally, remember to use appropriate risk and money management techniques. No pattern is the holy grail of trading, and the inside bar pattern, like many other classical chart patterns, has strengths and weaknesses.

So now that we’re all on the daily time frame looking for inside bars, the third thing you need to know is that it must occur within a strong trend. If you look at a one hour chart, you can probably find multiple inside bars in a single day, whereas you might find just one or two inside bars on the daily chart for the same currency pair. But, there were other inside bars, as well, and not all worked as favorably as that final one.

The Selling and Buying rules for inside bar differ, and so you must know which rules apply to each to maximize your trading profits. In simple terms the Mother candlestick engulfs the second candle stick completely. Now let’s take a look at the same setup, only this time we will look back a few weeks to see why this setup didn’t work. As shown in the image to the right, the engulfing candle is more appropriately referred to as the “mother bar”. As odd as it is many aspects of trading analysis aren’t necessarily based on what’s happening as much as what isn’t happening. You can notice on the chart below that right after the Inside Bar entrance; the Moving Averages are below the 0 level.

Finally, take profit is placed at the highest level of the last swing price. The first candle has a tall body, sometimes very large wicks, and is called the mother bar. The second candle has a small body, sometimes having low wicks, and is called the baby candle. The inside bar formation is completed when the second candle closes within the body of the mother candle.