Forex trading system based on the DIBS method

Author: Ignacio Campo
Ignacio Campo
All publications of the author

The DIBS method stands for Daily Inside Bar Setup, and it is among the least known yet highly profitable trading strategies. A trader called Peter Crowns, a successful trader who worked on the trading floor at CME (Chicago Mercantile Exchange) for 8 years, created this particular trading strategy. After this, he got an office, but still traded in options and futures for 9 more years. Then he shifted to the forex market as it was growing and was successful there too.

From his vast past experience, Crowns was able to come up with the DIBS method that was successful in the forex market just as it was in the options and futures markets (Futures trading). Unlike other successful traders who publish books with their own trading systems, Crowns instead offered it to us for free through a popular online forum which he joined in 2008. He later wrote about the DIBS trading system in 2009, and the forex trading strategy has become quite popular among traders.

The secret behind the DIBS method of FX trading

From his experience, Peter Crowns discovered that markets tend to trend more often that trend reversals occur. This means that, in the 5 trading days of the week, the markets will spend most of that time in a trend than they will changing direction. The same occurs when you observe the markets for weeks, months or even years. This is the main principle behind the DIBS trading system. (DeMark trend trading method)

From this foundation, Crowns was then able to come up with two golden rules:

  • look for buying opportunities if the markets are trading above the day’s opening price
  • look for selling opportunities if the markets are trading below the day’s closing price

From the basic principle, we can see where these golden rules come from, because the markets will keep within the trend established at the start of the day. So, when a currency pair starts the day on a positive note, get ready to buy and vice versa. It is also clear when you consider market psychology. (Forex market sentiment indicators)

Imagine a forex trader in London getting to work at 8am only to find that, say, the EUR/USD is trending upwards, what do you think he’s going to do? Probably buy, right? He is going to assume traders during the Asian session have confidence in the euro, and so will he. Forex traders are always looking to ride the wave and follow whatever trend has already been set, and that is why this trading system works so well.

How this trading method works

The first step is to identify when the trading day starts. For us, it will be around 6AM (GMT). The time on your Forex trading platforms may different from your local time and from GMT time, so you ought to figure out the time difference. The time listed on your platform will depend on the server location of the forex trading companies, but as long as you know the time difference, it shouldn’t be too big a deal. Besides, we’ve included an indicator along with this post that shows you when the trading day at 6AM (GMT) starts and ends. Plus, it indicates the previous day’s highs and lows.

Once you get the time factor out of the way, now we deal with the actual analysis. To know whether the markets might go u or down, we’re going to search for an inside bar pattern near the trading session’s open. So, once it’s 6AM (GMT), we start to look for the formation of an inside bar. If you’re not familiar with the concept, an inside bar is a common candlestick pattern formed when there is a lot of indecision in the markets.

The inside bar pattern is formed when a candlestick is completely engulfed by the previous one, as shown above. As you can see, the internal candle is completely engulfed by the maternal candle. In a trend, a candle should form lower lows and higher highs, so this candlestick shows that there is still indecision in the markets.

At around 6AM GMT, traders in the London session are just getting to work and making their first trades, trying to determine the direction of the markets. If an inside bar forms around this time, then these traders will determine the trend for the rest of the day and, perhaps, week. Here is an example of the DIBS trading method at work:

On the 1st day of August, 2017 here at 6AM (GMT), we see the newly formed candle forming above the previous session’s closing high. That already tells us that this might be an ‘up’ day in the markets. As per the principles of the DIBS trading method, we now sit and wait for an inside bar to form, at which point we are going to open a trade. In this case, a long position. 5 hours later, an inside bar setup does indeed form in the real-time forex charts, and if we had opened a long position, the upward trend would have kept on going for the rest of the day.

Waiting 5 hours to make a trade may seem like a long wait, but that is the nature of the forex market. In fact, heed the words of Jesse Livermore, the Great Bear of Wall Street who attributed his success to the sitting down in wait rather than the action itself.

More about the DIBS trading system

When Peter Crowns created this forex trading strategy, he did so to help us identify long-term trends. From our example above, we would have had a great day using this DIBS method. The creator’s preferred timeframe was the H1 chart, but we have tested it on several other timeframes, and it works just as well on any timeframe from the M15, M30, H1 to H4.

Also remember to consider proper risk management when you use this system. Like any other trading strategy, it’s not perfect and you should protect yourself from any potential losses. An ideal stop-loss position would be just below the inside bar candlestick on an uptrend and below it on a downtrend.

Download indicators for the DIBS method

This being a derivative of the inside bar breakout strategy, it’s important you learn the basics as shown in this video:

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