Today’s lesson is an introduction to the inside bar signal and how to trade it. It’s really one of my favorite patterns to trade, especially on the daily chart time frame. Why, you ask?
It’s simple. The inside bar pattern shows a pause or indecision in the market, and depending on the surrounding price context it formed within, this provides us with an extremely valuable clue about what a market is about to do next.
The inside bar is yet another “tool” in your price action toolbox that will add to your trading strategy which when mastered will help improve your chances of long-term trading success.
Let’s get started with some introductory concepts and theory on inside bars…
What is An Inside Bar?
An inside bar pattern is a multi-bar pattern that consists of a “mother bar” which is the first bar in the pattern, followed by the inside bar. An inside bar pattern can sometimes have multiple inside bars within the same mother bar.
Here is what standard inside bars look like:
As you can see by the image below, inside bars can form exactly in the middle of the mother bar or close to either the high or low, there is not an EXACT way they have to look, just as long as they are contained within high to low distance of the mother bar
4 Variations of Standard Inside Bars
1. Double (multi) inside bar
The “double inside bar” consists of two inside bars within the structure of the mother bar. They are pretty common and often times you will even see 3, 4 or sometimes (rarer) even more inside bars within the same mother bar structure. These patterns signify a prolonged period of indecision in the market and they can come before very powerful breakout moves…
Trading Inside Bar Patterns
There are essentially two main ways we can look to trade inside bars, as with most other patterns; as a continuation signal or as a reversal pattern.
Now, I prefer to trade them as continuation signals in trending markets on the daily chart, because that’s the easiest way to trade them quite frankly. However, inside bars CAN indeed be very powerful at major support and resistance levels as reversals. Let’s look at some examples:
Trading Inside Bars as Continuation Moves
The “classic” way to trade an inside bar pattern, and the way that I love trading them the most, is within a trending market, as a continuation move.
An inside bar is much easier to take in a trending market because the odds are already in your favor for trading with the trend. The inside bar will many times lead to a breakout or continuation in-line with the existing trend direction. They can provide a good structure to try to pyramid your trade into a huge win.
Tip: Avoid trading inside bars at major levels until the level has cleared, because many times such inside bars will create a false break at the major level.
Trading Inside Bars as “Stall Patterns” / Reversals
Sometimes, you can trade an inside bar as a reversal / stall pattern where price “stalls” out at a level and that leads to a reversal back the other direction.
In the chart below, we can see an example of a good inside bar reversal signal. Notice that the inside bar formed at a key chart level, indicating the market was hesitating and “unsure” if it wanted to move any higher. We can see a strong downside move occurred as price broke down past the inside bar’s mother bar low..
Please note that trading inside bars as reversal patterns should ONLY be tried after you have successfully mastered trading them in-line with the daily chart trend as continuation / breakout plays, as we discussed above.
Special Inside Bar Trading Tips
Here are some of my tips and tricks when trading inside bars. These are things that I learned over the years that will improve your chances of success when trading this pattern:
Tighter inside bar patterns and coiling inside bar patterns often lead to explosive large break out moves. This is because of the “stored energy” that took place as the market “coiled”, that energy typically gets released in the form of a strong breakout move…
Comments