Should I start with an introduction to the Inside bar? Of course not, you have already learned that, and you’re here for something more; to learn about the best Inside Bar trading strategy.
Since the inside bar is a very powerful candlestick pattern, it is quite mandatory to move ahead with the right approach so that it can serve us with better-timed entries with low risks. That would be quite worthwhile, wouldn’t it be?
But before hopping on to the inside candle trading strategy, let’s have a glance at Inside bar and its operations.
What is Inside Bar, and How Does It Operate?
The inside bar is not a bar; it is a candle that is guided by a previous candle, much like this:
Therefore, whenever you see an inside bar, it refers to the period of lower market volatility. However, not all inside bars are created equal. Are you curious as to why? Here it is:
- Inside bar with a small range
Well, the name says it all. This is the one with a comparatively smaller range and is covered by a prior candle. This will tell you that there’s indecision and less volatility in the market.
- Inside bar with a large range
Now that there’s a candle with a smaller range, there has to be a candle with a larger range too, and this is the one. But here too, the range of the candle is covered by a prior candle, but the only difference you’ll notice in this one is that the range of the candle would be larger.
- Multiple Inside bars
And now, everything altogether. That’s right, you can have all the inside bars together too. And the plus point is, this one will inform you if there’s low volatility in the market, which makes it a powerful pattern.
Well, you must be aware that volatility in the market is always changing, it will move from high to low or vice versa. But now you know that when you see multiple bars together, there are chances to witness a big move in the market.
So these were the different levels on which inside bars are created. Coming back to our topic, inside bar candle strategy. Trading in an inside bar can be challenging at times. But not when you learn it the right way. Let’s then discover the right way to do it.
Inside Bar Trading Strategy
There are two major approaches to trade in an inside bar; reaching out for the trend, and applying the reversal strategy. Let’s start with the reversal one.
Catching the Reversal
One of the reasons that people find the Inside bar trading strategy a bit puzzling is that they get it wrong. A major proportion of traders like to trade within the market structure only. The price approaches to support and it forms an Inside bar. And if that’s the case, the traders will look to buy on the breakdown of the Inside bar.
The thing to remember here is that this approach is prone to fake out.
Trade with Trend
Now that you are aware of the process of how the inside bar lets the traders catch the reversal in the markets, next what we are moving on to is catching the trend.
In a trending market, the pullback is shallow. So to enter the direction of the trend, when the price continues after a pullback, you would have to enter as soon as the price resumes.
Here’s how-
- When the market is moving in a strong trend, wait for a pullback to occur then.
- Wait for an inside bar to form when a pullback occurs.
- Go on the long breaks of the highs when there’s an inside bar. Take a buy entry once it breaks high of the inside bar.
- Vice versa for the sale.
So these were the two approaches for trading in an inside bar. Let’s move on and learn about a variation in the same.
The Hikkake Pattern
Take it this way; you decide to buy when the price breaks the highs of the Inside Bar, But instead, the market made a 180-degree turn and fell downward after breaking the high of the inside bar. Now what? You’re just sitting there with nowhere else to go, or no option left.
This is the Hikkake Pattern, aka, the false breakout pattern.
Bearish Hikkake pattern
Bullish Hikkake pattern
The interesting part here is, the Hikkake pattern can be traded the same way you trade an Inside Bar, i.e., catching the reversal or catching the trend. But this one’s more powerful, the reason being, there are times when the breakout traders are caught on the wrong side of the move.
Entry, Exit, and Stops in Inside Bar
We’ve come a long way to understanding the whole Inside Bar, its trading strategies, and some other aspects, but what’s still missing in it is how to manage the entry, stop, and exit. Let’s find out.
Entry
Just when the price breaks out on the Inside bar, that’s when you can take an entry to it. This will be quite beneficial as you’ll be entering when the price is moving in your favor. But keep in mind that there’s still a possibility of a false breakout.
Otherwise, you can simply just wait for the candle to close.
Stop Loss
Since you have already learned the variation of the Inside bar, which is the Hikkake pattern, you would certainly not want to set it just beyond the lows of the inside bar.
This implies that you could get permanently stopped out on a Bullish Hikkake pattern if you set your stop loss just at the bottom of the lows of the Inside bar.
Hence, a better approach here will be setting up your stop loss ias1 ATR at the bottom of the low of the Inside bar (In case of buying).
Exit
This one depends on two aspects; whether you want to capture the swing or ride the trend. Let’s have a look-
- Capture the swing- In this case, you would have to take an exit from your trades before the opposing pressure takes a step in.
- Ride a trend- If you want to ride a trend on the other hand, then you will have to trail your stop loss as the market moves in our favor
Takeaway
Let’s recall what we’ve learned so far:
- When there’s an inside bar with a small range, it indicates indecision.
- Not all the Inside bars are created equally, what matters the most are the range and the body of an Inside Bar.
- Depending on the context of the markets, the inside bar can be used to trade in reversals or trends of the market.
- Another powerful pattern to profit from the trapped traders is the Hikkake pattern, which is a false breakout.
