Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.

Mastering the Inside Bar Trading Strategy - An Essential Guide

Author: Stelian Olar
Stelian Olar
All publications of the author

As a beginner trader producing consistent profits in the financial markets, I desperately searched for the perfect trading strategy. I wanted to find a particular strategy that could help me capitalize on opportunities in forex, stocks, commodities, and cryptocurrencies.

That's when I discovered the immense potential of the inside bar trading strategy.

The inside bar forex is a powerful yet often overlooked candlestick pattern that can be used across all markets. If you want to take your trading to the next level, you'll need to master inside bar trading and know how to identify trade setups.

In this comprehensive guide, you'll learn:

  • What is an inside bar in trading?

  • The psychology behind this versatile pattern.

  • I'll explain the three types of inside bars - bullish, bearish, and neutral.·        

  • How to incorporate them into reversal and trend continuation strategies.

  • You'll discover how to optimize entry timing while minimizing risk when trading inside bar candlestick patterns.

By the end of this guide, you'll have the confidence and skills to spot potential Forex inside bar trades and make consistent profits.

Unlock the immense potential of this underutilized inside bar trading strategy and take your trading profits to new heights!

Understanding the Inside Bar Pattern

An inside bar occurs when the entire price range of the current bar is within or 'inside' the price range of the previous bar or mother bar. It shows a period of consolidation after a large candle or significant price movement.

Inside bar setups form when the high and low of the current bar are within the upper and lower half of the previous candle. This demonstrates indecision after the initial price action as the market trades within a tighter inside bar consolidation range. The inside bar represents a pause as buyers and sellers become reluctant to push price movement further after the initial thrust.

A favorable inside bar setup forms when the inside bar occurs relative to key support and resistance levels. This prepares traders for a potential breakout as [inside bar patterns represent a period of balanced forces before continued price movement.

Now that we know what is inside bar in trading, let's dive into the three types of inside bars and how to trade them.

Types of Inside Bars

Let's examine the three types of inside bar candle patterns you may encounter:

  1. Bullish inside bar,

  2. Bearish inside bar

  3. And neutral.

Recognizing these chart patterns is key to applying the right Forex inside bar trading strategy.

Bullish Inside Bar

A bullish inside bar pattern forms when the entire high and low range of the second candle is within the first large bullish candle. This shows the market paused after an upward surge. Multiple bullish inside bar patterns signal a potential continuation of the uptrend.

Bearish Inside Bar

Conversely, a bearish inside bar has its range completely within the previous down bar pattern. This points to a brief consolidation before the downtrend resumes.

Neutral Inside Bar

Finally, a neutral inside bar occurs within the previous candle's body range but does not exhibit a clear bullish or bearish bias. These warrant caution as the inside bar candle pattern shows indecision and the potential for price movement in either opposite direction.

Now let's explore how to trade these forex inside bars.

Trading Strategies with Inside Bars

Now that you can identify different inside bar setups, let's discuss two effective strategies for trading the inside bar:

  1. the Reversal Strategy.

  2. the Trend Continuation Strategy.

Reversal Strategy

The reversal trading strategy aims to capitalize on trend reversals. You only need to look for an inside bar pattern on the daily chart time frame that signals the preceding trend may be ending. This profitable trade setup catches trend reversals early.

Here's how to harness this inside bar strategy:

  1. Identify the Trend: Before even contemplating an inside bar reversal, ensure a clear preceding trend is established. Use moving averages, trendlines, or other indicators to confirm the direction.

  2. The Inside Bar Takes Shape: Look for a bar whose high and low are contained within the previous bar's (mother bar) range. The smaller the inside bar, the stronger the potential reversal signal.

  3. Confirmation is Key: Don't jump the gun! On the third candle wait for a breakout beyond the mother bar's high or low or use the preceding bar. This decisive move confirms the trend's potential reversal.

  4. Enter and Exit with Precision: Place your entry order just beyond the breakout level (above for bullish breakouts, below for bearish). Use a stop-loss order below the inside bar's low for long positions and above its high for shorts to give the trade more breathing room. Begin taking profits progressively, with initial targets at key support/resistance levels or Fibonacci retracements. Remember, managing risk is crucial – aim for a minimum 1:2 risk-reward ratio.

Trend Continuation Strategy

The trend continuation strategy looks to take advantage of pauses in the dominant trend. Identify inside bar setups that occur in the direction of the prevailing trend and use the breakout to enter trades in line with the overarching trend. Ride the momentum as long as the trend continues and begin taking profits once you see signs of exhaustion.

Trading inside bar allows you to profit from market swings in either direction.

Next, let's discuss how to manage risks when using the inside bar trading strategy.

The Importance of Risk Management in Inside Bar Trading

While the inside bar pattern offers lucrative trading opportunities, proper risk management is crucial to trade inside bars forex successfully.

Setting Stop Losses 

When trading inside bar candlestick pattern, set your stop loss below the low of the inside bar trading range for long positions and above the high of the inside bar for short positions. This contained risk allows for riding out normal market fluctuations while protecting capital if the price breaks against the trade.

Position Sizing

Additionally, use sound position sizing rules for each profitable inside bar setup. Risk only 1-2% of capital per trade which ensures you have capital left for trading inside bars over time. Overleveraging leads to account blowups.

By combining excellent trade inside bars strategies with robust risk management, you remain in the game to capitalize on future opportunities. Keep these principles in mind when you put your inside bar trading skills into practice.

Combining Inside Bars with Technical Indicators

While the inside bar is powerful on its own, you can amplify your trading edge by combining them with technical indicators because they can provide additional context to recognize the best market conditions for patterns trading.

Oscillators like the RSI help gauge whether inside bars are forming in overbought/oversold conditions which usually signals exhaustion ahead of reversals. Moving averages can define the underlying trend direction.

As a general rule, only trade continuation inside bar patterns in a trending market.

For example, the MACD indicator can be used to identify strong momentum surges that precede inside bar pullbacks. Combine inside bars with the Ichimoku Cloud to trade only in the direction of the predominant trend.

There are endless possibilities for combining indicators with your forex trading strategy centered around inside bar patterns. Experiment to find what works best for your intraday trading. The right tool inside your trading toolbox can transform any mediocre continuation pattern into highly profitable setups.

Real-Life Examples of Inside Bar Trading

Studying real-world examples cements the theory into practice but first try paper trading inside bars in demo accounts. Let's examine 3 real-world examples across forex, stocks, and cryptocurrency:

Inside bar stock Example:

Tesla Daily Chart (Stocks): Tesla formed a bullish inside bar amid a strong uptrend. The next day (third day) the price action saw a breakout above the inside bar's high. Long entries captured the surge higher.

USDCAD Daily Chart:

A bearish inside bar formed after a sharp sell-off and the break below the inside bar triggered short entries, riding USDCAD lower in the downtrend.

Gold Inside Bar Example

Gold price printed a bearish inside bar following several red candles. The downside break triggered short trades which profited from the selling pressure. 

Common Mistakes and How to Avoid Them

While inside bars offer immense potential, some common mistakes can derail your success when pattern trading charts. Avoid these pitfalls:

  1. Trading every inside bar – Not every inside bar will necessarily signal a profitable move which is why you need to be selective and wait for the best setups.

  2. Acting prematurely before the market spends enough time in the inside bar. Give the pattern time to develop so you don't get faked out by false signals.

  3. Not considering market conditions – Inside bars can produce false signals in choppy or range-bound markets. It’s better to trade with the trend in the higher time frame.

  4. Poor risk management – Set stops beyond the high and low range, use proper position sizing, and don't risk too much per trade.

  5. Trading multiple inside bars in a row – Consecutive inside bars represent consolidation. Wait for a breakout with increased momentum.

  6. Not planning the trade – Determine entry, exit and stop loss levels before entering, and don't treat inside bars like gambling.

With proper analysis and planning, you can avoid these issues. Follow your trading plan with discipline over emotion. This keeps you profitable even through unavoidable losing streaks. Master the inside bar strategy and success will follow.

Final Thoughts 

If you've made it this far, you now have a solid foundation for trading the powerful inside bar trading strategy but, remember that success comes with screen time and practice so don't stop your learning here.

Review your trading journal regularly to cement the lessons learned from wins and losses. Study more chart examples across different markets and time frames so you can automatically spot profitable setups.

Most importantly, stick to your trading rules and plan. The most successful traders form good habits and discipline to execute decisively. Don't second guess your strategy or overcompensate after losses.

Now go and put your new inside bar skills to work!

Remember to start small, manage risk, and learn at your own pace.

With your newfound knowledge of inside bars, the next step is finding a reliable forex broker to trade them. I always recommend comparing forex brokers carefully first - not all are created equal. Some offer better platforms, lower spreads, quicker execution, and top-notch customer service. 

To find the best forex broker for your needs, check out our comparison of the top-rated brokers this year.

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Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.