If you are a fan of pure price action Forex trading using candlestick patterns, forex breakout strategy this lesson will be of particular interest to you. Today we will discuss a powerful candlestick formation which can often precede a sharp price move.
This formation that I am referring to is the Inside Bar pattern. We will discuss the structure of the inside bar setup and the psychology behind it. And finally we will go through a few of inside bar variations that you should become familiar with. What is an Inside Bar ?
The inside bar is a two bar candlestick pattern, which indicates price consolidation. In order to confirm this pattern you need to see a candle on the chart, which is fully contained within the previous bar. The Inside Bar is fairly easy to spot on the chart, but using an Inside Bar indicator can assist the trader in quickly finding these patterns on their price chart as well. Since the inside candle has a lower high and a higher low than the previous candlestick on the chart, this indicates that the currency pair is consolidating.
It is consolidating because the bulls cannot manage to create a higher high and at the same time the bears fail to create a lower low. As such, there is not sufficient buying or selling pressure to break the previous bar’s high or low. Since the Inside candle on the chart is a sign of a consolidating market, we can draw a horizontal support and resistance level around this range in anticipation of a future breakout. So as an informed price action trader, you should be looking for the break of the inside bar, which would provide a tradeable opportunity in the direction of the break. The inside bar formation can be traded in a myriad of ways.
What is most important is that the inside bar trading setup must adhere to pre-defined rules that the trader sets up per his own trading plan. We will discuss some examples of how a trader can approach setting up a trade when they see this pattern on their chart. When the price action completes an inside candle on the chart, you should mark the low and high of the Inside Bar consolidation range. These two levels are used to trigger of a potential trade. In simple terms, if the price action interrupts the range upwards, then you should go long. If the price action breaks the range downwards, then you should trade the short side.
The usage of a stop loss order is recommended for any Forex trading strategy. The inside bar trading system is no different. You should always put a stop loss when trading inside candles. The proper location of your stop loss is slightly beyond the inside candle’s top, or bottom, depending on the direction of the break. In other words, if the inside range gets broken upwards, you can buy the Forex pair and place a stop loss order right below the lower candlewick of the inside candle. The same is in force for bearish breakout of the inside range, but in the opposite direction. In this case you could sell the Forex pair and you put a stop loss right above the upper candlewick of the inside bar.
Projecting the potential move with Inside Bar Breakouts can be challenging. Often Inside Bar trades can lead to a prolonged impulse move after the breakout, so employing a trailing stop after price has moved in your favor is a smart trade management strategy. Along with this, I typically like to use a fixed Take Profit target at 1. 5:1 or 2:1 reward to risk ratio to scale out of inside bars trades.