Important things you need to know about the inside bars
The formation of the inside bar is a little tricky since the number of candlesticks associated with this pattern can vary depending on the market condition. The first candle is known as the mother candle and creates a price range for the next bar. Please note that you might have multiple inside bars for the same mother candle. However, the first bar should have a higher low and lower high than that of the mother candle to consider as a valid inside bar.
It might sound a little bit confusing to the naïve traders but the idea is really simple. The high and low of the mother bar has created a price range for the inside bar. The second candle which is known as the inside bar is closely contained within the body of the mother candle. But make sure that when you look for the inside bar pattern, you analyze the daily or weekly time frame. Once you spot such a pattern, you can switch to the lower time frame, preferably 1 hour or 30 minutes, to validate the pattern. If you spot a triangular pattern in the lower time frame, you have correctly identified the inside bar.
The basic idea of the inside bar remains within the price squeezing technique. This means the market will slowly lose its volatility and the bars will eventually get smaller. Most of the time such a pattern results in the aggressive breakout of the price. However, the breakout might favor the exiting trend or can cause a major reversal in the price.
So, how can we trade the inside bar?
To take advantage of the inside bar, you need to learn its trading technique. Though it can be used to trade the continuation of the major reversal, the pro traders love to focus on the continuation pattern. The execution of the trades based on the inside bar pattern is very simple. When the price breaks above or below the high or low of the inside bar, you can place the trade.
Look for the clear break in the price pattern to trade the inside bars. To improve your win rate, you must learn to find a good break. Feel free to check it out here so that you don’t end up by trading the market with the low end broker. Once you have access to the best trading environment, start trading with confidence once the market breaks the inside bar range.
However, some of the conservative traders often use the upper and lower range of the mother candle to validate the breakout. But by doing so you are potentially limiting the risk to reward ratio of the trade setups since you have to use a much wider stop loss. One of the key reasons why the inside bar is so popular among professional price action traders is because of the use of tight stop loss.
Placing the stops and managing the risk
When a short trade is executed, the stop is placed below the high of the inside bar. But if you have a series of the inside bar, you can consider the last candle to place your stops. In the case of a long trade, the stops are placed just below the low of the inside bar. So, the inside bar is much smaller than the mother candle and you can easily use a very tight stop for the trades. However, you can use twist while trading the inside bar pattern.
If the breakout favors the direction of the trend, you can risk 2-3% of your account balance. But if the breakout suggests a reversal, you should limit the risk factors to 1%. This simple variation to your risk management plan can reduce the risk to a great extent while trading the inside bar.