Inside Bar Pattern Price Action Strategy Explained With Examples
The “inside bar” pattern is a two-bar price action trading strategy in which the inside bar is smaller and within the high to low range of the prior bar. In other words, the high is lower than the previous bar’s high, and the low is higher than the previous bar’s low. This pattern can be used to identify potential reversals or continuation of a trend. When used with other technical indicators, such as support and resistance levels, it can provide a trader with a high probability setup. The key to trading inside bars is to wait for a breakout in either direction before entering a trade. This ensures that you are trading with the trend and not against it. Although there are no guarantees in trading, following this strategy can help you increase your chances of success.
Inside Bar Pattern Introduction:
Before progressing to the main methods, you need to understand the basics of the inside bar. This is a price action strategy.
What is the inside bar pattern?
• The pattern of this cute arrangement is called “Mother and Baby candles.” It consists of the mother and baby candles.
• The baby candle’s highs must not be higher than the mother candle and lows must not be lower than the mother’s candle. The baby candle can be one or many.
The uses of inside bar pattern:
The pattern suggests that the market is uncertain and in an indecision phase.
If the mother’s candle highs or lows break, it means that the price may move significantly.
In this post, I’m going to teach you two steps for getting ready to make an entry into the market.
The first step is finding out what the trend of the market is. This will help you avoid bad trades and only make trades in the direction of the trend.
The second step is using inside bar patterns as trading signals.
Next, I’ll go into more detail about each step.
The Inside Bar Pattern Method:
Step 1: Identify Trend
Open your chart and set a moving averages indicator to exponential. This will help you find the average price of a stock over time. Set it to 21 so you can get a more accurate reading.
To determine the trend, find the EMA 21. If it is below the price, then it is a buy/bullish trend.
In order for the trend to be bearish/sell, the EMA 21 must be above the price.
Once you have completed the first step, move on to the second step.
Step 2: Inside Bar Breakout
The reason for identifying the trend is to help us avoid bad trades.
For example, if the inside bar breakout is up (meaning that the baby candle has broken the mother’s candle high), then trade only if the trend is bullish/up. If the trend is bearish/sell, ignore the inside bar breakout signal (due to against the trend).
For buy/bullish trade:
The trend is going up, which means people are buying. The baby candle (new price trend) must break the mother’s candle highs (old price trend).
Tip: You can set a pending order to buy above the mother’s candle high instead of waiting for it to break.
For sell/bearish trade:
The current trend is downwards/selling. In order to sell, you should place a pending order to sell below the mother’s candle lows.
Tip: You can also place a sell order below the mother’s candle lows instead of waiting for it to break.
Stop Loss and Profit Target
For buy: Set the stop loss below the previous baby candle lows. If you want to be extra safe, you can also multiply the stop loss range by two to get your profit target.
In this scenario, the stop loss is 40 pip. This means that if the price falls by 40 pip, the trade will be closed. To get a 1:2 risk: reward ratio, we need to set a profit target of 80 pip.
To set a stop loss, we should place it above the previous baby candle highs. For the profit target, we should use the risk: reward tactic. If we choose to use a 1:2 risk: reward ratio, then we should multiply the stop loss range by two.
Risk Reward: 1:2, 40 pip x 2= 80 pip profit target.
The Inside Bar Pattern Method In A Nutshell:
The moving average indicator can help you identify trends. When you see an “inside bar” breakout, it’s important to make sure the trend is going in the right direction first. You can do this by using a pending order instead of waiting for the breakout to happen. This will help you set your stop loss and profit target. And finally, remember to use the risk-reward system to make sure your trade is profitable.
I hope you find this information helpful!