In this article we will be discussing the inside bar price action formations. Inside bars are great indicators on what the market is trying to communicate to us. An inside bar is a bar that has completely been overtaken by the previous bar (including the wicks of the candles); they are fairly common patterns seen on the charts. Candle “q” is sometimes known as the mother candle and “u” is the baby, or inside, candle. Although inside bars can form for many reasons, they can mean one of two things: either a continuation pattern in the direction of the trend, or an exhaustive period where the market will reverse course.
Here are several scenarios where inside bars could form: (1) right before a major news announcement where liquidity dries up; (2) after a prolonged move in the markets where investors are booking profits; or (3) at a major support or resistance level in the markets. As we will see later, not every inside bar is an ideal spot to place a trade. Major news announcements can go either way and thus lead to poor trades; one also runs the risk of false breakouts at major supports and resistance with inside bars. Therefore, it is critical to know your environment and to place favourable trades when conditions are prime.
Forex Inside Bar Trading
Nevertheless, inside bars, when formed with a trend as shown in the chart below, present high probability trades (if executed correctly). All of the six inside bars that formed on this daily chart could have resulted in a profitable trade. With the case below we can see how trading Forex inside bars with a trend can lead to great momentum breakout plays. Just remember: you must execute trades that follow the preceding big moves.
In the case of the Inside Bar Exhaustion chart below, an inside bar was created out of exhaustion and so continuation of the trend was not able to be carried out, due largely to a lack of commitment by the buyers (the bids). This inside bar formation was also at an important long-term resistance level where price was not able to cross.
In the end, inside bars are good clues as to what the market is communicating and can lead to strong price moves. Inside bars that form with the trend are usually good opportunities to enter for breakout plays. However, as mentioned above, watch out for certain criteria. Inside bars that form at a major value area or after an over-extended move may be worth staying on the sidelines.
Inside Bar Trading Traps
Not every inside bar will work in your favour. This is where your judgment and experience will come into practice. Nevertheless, here are some potential inside bar traps:
• Inside bars that form at a significant area of support or resistance;
• Sunday or Holiday inside bars;
• Inside bars right before an important news announcement;
• Inside bars that form after an extended move in the market.
Inside Bar Trade: An Example
In the example below, we can see how when price broke through an important resistance zone, there were inside bars printed, suggesting that traders were booking profits and that the trend would go higher. In this case, a limit buy order was placed over the price consolidation in order to catch a momentum breakout. A stop loss was placed below the resistance zone, just in case price would pull back to retest and the support and fail. This trade would have made a significant profit right up until the change in the market environment.
If you would like to learn more about inside bars, please see our advanced price action course. We go into depth regarding inside bars and other price action setups so you can learn how to trade profitably. Our Advanced Members Course can be seen here.