Some inexperienced traders trade the pattern against the direction of the main trend thinking it can cause the trend to reverse. Oscillator indicators are very helpful in trading inside bar trading strategy a ranging market since they show when a price move is losing momentum and likely to reverse. When the price reaches any of the boundaries, look out for an inside bar pattern.

  1. However, if you have two bars with the same high and low, it’s generally not considered an inside bar by most traders.
  2. In other words, the Inside Bar has a higher low and lower high than the previous bar.
  3. Since price volatility has subsided and the price stayed completely within the range of the previous bar, either buying pressure has increased or selling pressure has decreased.
  4. Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors.
  5. Adjust your risk management approach based on your risk tolerance, trading style, and market conditions.

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In this section, we will define the inside bar pattern and guide you through the process of spotting this unique formation in various markets. Inside bars signal continuation or reversals, which makes this trading pattern more complex. False breakouts can occur which lessens the reliability of the inside bar as an isolated pattern which is why traders prefer using the inside bar as part of an overall forex trading strategy. That is, the strategy is the foundation with the inside bar seen as more of a prompt.

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When trading the Japanese candlestick patterns, the moving average indicator can be quite useful. As mentioned previously, the inside bar represents a period of short-term consolidation with low volatility within a trending market. Again, some traders can get so wrapped up in taking trades that they forget to examine the quality of the signal. If you are still struggling with drawing support and resistance levels, read this guide. In a downtrend, the moving average indicator, especially the longer-period moving average, can act as a dynamic resistance level.

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We added the Relative Strength Index (RSI) indicator as our confluence trading tool to see if the price continues with the trend, reverses, or stays in range mode. In a strong trending market (when the price is above 20MA), the pullback is shallow. The classic entry for an inside bar signal is to place a buy stop or sell stop at the high or low of the mother bar, and then when price breakouts above or below the mother bar, your entry order is filled.

Putting stop loss too close to your trade entry

If the currency pair prices diverge from the existing trend before the price consolidates, a reverse price breakout is confirmed. The Inside Bar pattern works best when the market is currently trending. The stronger the trend, the easier it is for the pattern to provide a reliable signal. If the market is not showing any certain trend, the Inside Bar pattern will not be able to form due to the uncertain market movement.

To be sure that the market is actually in a range, you need to mark out the boundaries by connecting two consecutive swing highs as the upper boundary and two consecutive swing lows as the lower boundary. So, you must be ready to get out fast if a breakout happens, since the price can move very fast in such situations. Derived from the ratios of the Fibonacci sequence, the retracement levels estimate the percentage of the preceding impulse that the pullback can get to before reversing. TrendSpider’s Strategy Tester is the industry’s most powerful backtesting solution.

In the AUD USD  chart below, you can see that the inside bar pattern occurred when the pullback got around the 61.8% Fibonacci level, which acted as a support level. 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.. When you combine a pin bar into an inside bar, you are getting both a “wind-up” that is going to be released and a pin bar with a tail / shadow that indicates the next potential direction of the market. Hence, an inside bar is not just a pause in the market, it’s a pause with an extra piece of confluence behind it, and as a result, a more powerful price action signal.

Some traders prefer to enter using a stop order and when the price breaks out of the InSide Bar. Many like this method because they enter the trade just as price moves in their favor. Please be mindful, however, that there is a possibility of a false breakout in this case. Traders could also wait for the candle to close, but this comes with the risk of missing a big move in the market. This pattern tells the trader where there is low volatility within the markets.

The pivotal moment happens with the emergence of the third candlestick of the Inside Bar chart pattern, surpassing the second candle and signalling a potential uptick in the price. In this scenario, you must have pinpointed the Inside Bar setup characterised by a notably large bullish candle succeeded by a smaller bearish candle, encapsulated by the first candlestick of the Inside Bar pattern. There are various types of Forex trading strategies that you can use with the Inside Bar pattern, including range and breakout trading. As mentioned above, when trading the Inside Bar chart pattern you need to look for the mother bar or candle, followed by the smaller candle, called the baby bar.

RSI, MAs, SMAs and EMA as well as more advanced indicators such as Bollinger Bands can help you gather as much insight and data as possible. A bullish Inside Bar can show that the buyers have a slight upper hand, whereas a bearish Inside Bar can show that the balance is skewed slightly towards the sellers. An Inside Bar must stay completely WITHIN the range of the bar immediately before it. TrendSpider is designed to streamline all four parts of the trading process to save you time and help you generate better results. Thank you for taking your precious time to share your valuable insights with us. And with a smaller stop loss, you can put on larger position size and still keep your risk constant.

In other words, the Inside Bar has a higher low and lower high than the previous bar. It does not matter if the Inside Bar is bullish or bearish, all that matters is where the Inside Bar prints relative to existing price action. The GBPUSD chart below shows a downtrend, with the Fibonacci levels acting as resistance levels. The tool helps you to predict the levels in the market that can potentially act as a support or resistance level. In a downtrend, look for the inside bar pattern at the end of a rally to a known resistance level so that you can ride the impulse wave down when the price resumes the decline. In the AUD USD chart below, the price is trending up and broke the resistance level, which later became a support level.

Virtual Assets are volatile and their value may fluctuate, which can lead to potential gains or significant losses. If you do not understand the risks involved, or if you have any questions regarding the PrimeXBT products, you should seek independent financial and/or legal advice if necessary. Inside Bar setup can be another weapon in your arsenal when trading and creating an effective strategy. It can be used given the right conditions to place potentially profitable trades by forecasting subsequent price action. A breakout above or below the Inside Bar’s range serves as a signal to enter a trade, anticipating a price movement in the direction of the breakout. For example, you may see the Inside Bar candle pattern develop, but it seems to be testing the range of resistance or support.