The Inside Bar

Filed under: Learn Forex Trading |

Following on from our explanation of the engulfing pattern last week, I would like today to elaborate on another price action signal – the “inside bar”.

Figure 1.

We talked briefly about the inside bar in the article about price action signals, which gave a brief overview of the pattern. Just to recap, an inside bar forms when one candle is completely engulfed by the preceding candle, which we call the mother candle (see Figure 1.). It is better if the inside bar candle is already moving in the direction of the breakout that you want to occur, but this is not totally necessary.

You should not just trade inside bars anywhere on a trading chart though. The inside bar could break out either way, and it could even be a false break. So they are a little tricky. An inside bar shows that the market is consolidating – and that the market is unsure of what to do next. If an inside bar is at a key level of support or resistance, it could be about to reverse. As you can see from Figure 2 for example, a market that has been moving down could hit a key resistance level and then form an inside bar. If we think that price will not break this level because it has been rejected on many previous occasions, we could put an order in at the break of the mother candle to the upside. If we did this in Figure 2, our order would have been filled and we’d be in a nice profit.

Figure 2.

Figure 3.

Alternatively, you could trade an inside bar in a trending market that you anticipate to continue. If the trend is particularly strong in a bull market (see Figure 3.), you could put an order in on the break of the mother candle to the upside, hoping that the trend will continue. If you’d set this order in for Figure 3, your order would have been filled and again, you’d be in profit. And of course, you should always have a good risk reward when making such trades.

I hope that has shed a little light on the inside bar setup, and I’ll be back next time with another price action strategy. Happy trading.

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