How to Use The Inside Bar Forex Trading Strategy
Inside bars are probably one of the best price action setups to trade Forex with. This is due to the fact that they are a high-chance Forex trading strategy. They provide traders with a nice risk-reward ratio for the simple reason that they require smaller stop-losses compared to other setups. Many traders find inside bar Forex trading on the daily chart time frame, and in powerful trending markets, offers good opportunities.
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Explaining The Inside Bar Pattern
They can also be successfully utilised as reversal signals from key chart levels. What do we mean by the term inside bar? Inside bar is a series of bars contained within the range of the concrete foregoing bar, often referred to as the 'mother bar'. What the inside bar ought to have is a higher low and a lower high than the preceding or mother bar. If on a smaller frame of time, like a 1 hour chart, then a daily chart inside bar for Forex will, from time to time, form a triangular pattern.
You should also note that as the inside bar setup is very similar to the nature of a potential breakout signal, it is recommended by professional traders to solely enter an inside bar on the breakout of the preceding bar's high or low. For instance, if you are aiming to purchase, you should place a purchase on the stop entry only above the mother bar high. Conversely, if you are aiming to sell, you should place a sell on the stop entry precisely below the mother bar low.
There are a lot of variations, but the approach we define is an inside bar setup, where the inside bar is contained within the range of the foregoing bar from high to low. Additionally, you may have multiple inside bars within the range of one particular mother bar. If you observe a pattern of successive inside bars that are coiling and all within the preceding bar's range, this can be a sign of a strong breakout coming. We have prepared this article with the main goal of describing the inside bar Forex trading strategy.
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The Meaning Of Inside Bar Trading
This strategy presents a signal to Forex traders that a continuation or a reversal is about to occur. An inside bar identifies a time of consolidation or indecisiveness. In addition, inside bars commonly occur as the Forex market consolidates itself, following a large directional movement. They may also take place at turning points in the market, as well as at main decision points, like major support or resistance levels.
They frequently provide traders with a low-risk place to join a trade, or a logical exit point. When it comes to turning point signals and continuation signals, they can be used in both scenarios, however, the continuation signals are more reliable and much easier for beginner traders to master. As for inside bar Forex indicator reversal signals, or turning-points, it is better to approach this once you have solid experience in the Forex market.
Guide For Trading Inside Bars
There are technically two ways of trading an inside bar setup, and that is as either a reversal or a continuation signal. Continuation signals often result in a continuation of the preceding momentum, prior to their formation. Inside bars like that, most of the time result in nice breakouts in-line with the current trend, as well as near-term momentum. Basically, there are two various stop-loss positions for inside bar strategy setups, and you will need to apply some discretion when deciding the best one for each in the list of inside bars you trade.
The classic and most widely utilised stop-loss arrangement will be precisely above or below the mother bar high or low. It depends on if you trade long or short. The typical action is to go with 1 pip over or below the mother bar high or low. There is no necessity in trying and figuring out the best distance above, or vice versa below the preceding bar - the trade either performs well, or it doesn't. A few pips will not create a great difference over the long run in these instances
Let's look at another important stop placement. It is regularly utilised on inside bars with bigger mother bars. Though a larger mother bar on a certain inside bar setup isn't what you want to see, you are occasionally able to trade inside bars with bigger mother bars, and in the case that you do, you will most likely want to position your stop-loss near the mother bar 50% level. That is, to say, a golden middle between the high and low of the mother bar.
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This is the only effective method for receiving a satisfactory risk-reward ratio on these kinds of inside bar Forex trading setups. It is suggested by professional traders to use smaller and tighter inside bars, which do not have too big mother bars. This represents more compression, and therefore a powerful potential breakout from that compression. Whether you are a newbie or a novice trader, it is advised to avoid inside bars with large mother bars for now.
The most rational time to utilise an inside bar is when a powerful trend is in progress, or when the Forex market has plainly been moving in one certain direction, and then pauses for a short period. Inside bars can be applied when trading a concrete trend on 4 hour charts, or even daily charts, although trading inside bars Forex on daily charts is preferable, especially for novices.
If you are a newbie trader, do this until you have mastered and found steady success with the inside bar setup on that frame of time. You may also stick to inside bars, which are in-line with the daily chart trend as particular continuation signals, until you have completely mastered trading them that way.
You might also occasionally trade inside bars as reversal signals from main chart levels. It is suggested by professional traders that you be mindful of the fact that this should only be attempted after you have gained a full understanding of trading inside bars in-line with the daily chart trend - like continuation/breakout plays.
The Best Timeframe For Trading Inside Bars
The best time to trade an inside bar Forex trading strategy is on a daily chart time frame. The reason for this is that on time frames below the daily chart, inside bars grow too much to be worth trading. There can be long strings of inside bars on either a 4-hour or a 1-hour chart prior to a breakout for instance, and attempting to trade them can cause a lot of confusion, due to the amount of false breaks that may occur on those chart time frames.
Many traders waste their time trading inside bars on lower time frame charts. Once you have experience, you may be able to trade inside bars on a 4- hour chart frame of time, however, that is the lowest time frame it is suggested to trade an inside bar on. The daily chart is the best for inside bars, and additionally, even the weekly chart can, from time to time, yield some very profitable inside bar setups.
Furthermore, inside bars can be applied while trading a particular trend on either the 240-minute charts, or the daily Forex charts. All newbies are recommended to stick to the daily charts until they have completely learnt and found constant success with the inside bar setup in that frame of time.
To get a detailed outline of using the Inside Bar trading setup in video format, have a look at our video below:
Conclusion: Forex Traders And Inside Bar Trading
As you can see, the inside bar Forex strategy is a useful strategy for Forex traders. There are concrete methods available for using inside bars, and what you use will depend on your personality, what you want to achieve, and of course, your own proficiency level. As a beginner, stick to charts which do not require a more advanced understanding, and proceed only after gaining a true understanding of the system and the Forex market.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
Frequently Asked Questions
What Is inside bar trading strategy?
The inside bar trading strategy is a two-bar pattern where the second bar is within the high to low range of the prior bar. It signals potential market reversal or breakout. Traders use it to anticipate price movements based on the pattern's context within a chart.
Which traders could use the inside bar trading strategy?
The inside bar trading strategy is suitable for traders who prefer price action analysis and look for potential trend reversals or breakouts. Intermediate to advanced traders could benefit as it requires understanding of price action context and chart patterns. Trend followers, risk-averse traders as well as breakout traders could utilise the inside bar trading strategy.