Forex Inside Bar Strategy - Learn How That Works

Forex traders seek reversal signs when one trend is getting exhausted and is about to reverse, and a new trend starts. Reversal points are crucial for traders who hold by-trend positions as well as for traders searching for new entry opportunities. Price charts are full of information and the only thing a successful trader needs is to know how to read them. This article is aimed to explain one of the most simple and reliable chart patterns widely used in technical analysis - Inside Bar.

What is Inside Bar?



Inside Bar is a chart pattern consisting of two candlesticks or bars. The first candle or Mother Bar has usually a long body in the same direction as the previous trend.

Here is the definition of a bearish inside bar:

If the following bar’s open is lower than the high of the Mother Bar, and the close rate is higher than the Mother Bar’s close, then such a formation is called Inside Bar. An example is shown in the screenshot below.

Forex Inside Bar Strategy - Learn How That Works


A bullish Inside Bar can be described as follows:

The second bar’s open is higher than the Mother Bar’s close, and the close rate of the second candlestick is lower than the previous one.

Forex Inside Bar Strategy - Learn How That Works


What does Inside Bar mean for the price action?



In most cases, an Inside Bar occurs when the market is indecisiveness in terms of further trend’s direction. It also can signal a reversal in the scope that the previous trend is getting exhausted and buyers or sellers do not have enough momentum to push prices higher or lower, respectively. Nonetheless, forex traders use Inside Bar formation as a signal to consider some changes in the market conditions, including possible consolidation if not reversal.

Examples of Inside Bar chart patterns



In July 2015, the U.S. stock market was consolidating at the all-time high levels, struggling to proceed with the long-term bullish trend. Traders’ minds were split as some were predicting a continuation, while others were insisting on the need for a healthy retracement. An inside Bar pattern signalled the second option as the bear market was in play throughout 11 weeks after that. Below is a screenshot of the weekly S&P 500 chart.

Forex Inside Bar Strategy - Learn How That Works


One more brilliant example of the Inside Bar trading is illustrated in the screenshot below. WTI Crude Oil price dropped 20% in summer 2017, and the black gold bulls were desperately trying to find a reversal signal on the daily chart, pointing to an end of the sell-off. It came exactly with the Inside Bar Pattern, and the price of oil recovered all of the previous losses.

Forex Inside Bar Strategy - Learn How That Works


How to use Inside Bar in Forex trading?



There are different types of trading inside bars in Forex. In case of reversal signal, traders take profits from previous trading positions and open deals in the opposite direction. Sometimes it happens that inside bars point to indecisive market conditions when an asset is getting into a consolidation period. Borders of the Inside Bar pattern can be used as breakout levels to place postponed buy or sell orders using the breakthrough trading strategy.

Confirmation of reversal



After a double inside bar pattern was charted in February 2019, the U.S. dollar index was hovering inside borders of the Mother Bar for a few more days. However, once the daily rate breached the bottom of the range, the bearish breakthrough was confirmed and the index entered a phase of deeper bearish retracement.

Forex Inside Bar Strategy - Learn How That Works


Breakout signal after consolidation



This example is related to consolidative price action. Although Palladium had a bearish Inside Bar, the uptrend was continued after consolidation and breakout of the Mother Bar’s upper band.

Forex Inside Bar Strategy - Learn How That Works


The best time frame to trade with Inside Bar Strategy



The inside bar trading system shows the most effective performance on the daily timeframe. This chart period is also recommended for beginner forex traders as they have to make sure about sustainable trading results before switching to other timeframes. Intraday charts such as 240- and 60-minutes are full of potentially false trading signals and traders should have enough experience to use additional filtering or technical indicators to divide pure price action from fake breakouts. Sometimes the Inside Bar trading strategy is applicable for the weekly period, however, such signals are quite rare in the Forex market.

Trading Rules for long-term and short-term Conditions



Trader Rules for long Conditions:

  • Once an inside bar pattern occurred on the daily chart after a strong downtrend, and the Mother Bar is red candlestick with a large body, traders should consider opening a long position.
  • Stop-loss orders have to be set one pip below the close rate of Mother Bar.
  • After the rate breaks out of the resistance level, the stop-loss order should be shifted to non-risk mode.
  • Take-profit orders depend on individual trading strategy and the underlying asset.


Trader Rules for short Conditions:

  • After an inside-bar pattern occurred on the daily chart following a strong uptrend, and the Mother Bar is green candlestick with a large body, traders should consider opening a short position.
  • Stop-loss orders have to be set one pip above the close rate of Mother Bar.
  • After the rate breaks out of the support level, the stop-loss order should be shifted to non-risk mode.
  • Take-profit orders depend on individual trading strategy and the underlying asset.


Inside Bar with Bollinger Bands



One of the most effective secondary tools to use together with the inside bar in forex is Bollinger Bands. The indicator is widely used not only to show large volatility spikes and determine the average ranges of the price, but it also clearly shows when the market is about to reverse. In a case with long positions, traders should seek a moment when the close rate of Mother Bar appears below the bottom line of the Bollinger bands, while the following candlestick appears back inside the range. Short positions are usually opened when the Inside Bar pattern occurs on the upper line of the band.
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10.09.2019
Investment strategies