If you’re a trader looking for a straightforward trading strategy, the inside bar pattern strategy might be just what you need. This popular price action strategy can provide clear entry and exit signals, making it a powerful tool.
To make smart decisions when trading on the financial markets, you need to carefully look at price patterns. The inside bar pattern is a candlestick pattern that traders use frequently and trust. In this blog, we’ll talk about what an inside bar pattern is, whether it’s a bullish or a bearish sign, how to trade Inside Bar Pattern, some Inside Bar Pattern trading strategies and a lot more on it.
What is an inside bar pattern?
The inside bar pattern is a type of candlestick pattern that appears when the high and low of one candlestick are between the high and low of the previous candlestick. In other words, the inside bar is a smaller candlestick that fits inside the range of the candlestick before it. It is called an “inside bar” because it fits “inside” the high and low of the previous candlestick.
The inside bar pattern may occur in any time frame and on any financial market, such as stocks, forex, commodities, and cryptocurrencies. It may occur on both bullish and bearish trends and is called a “consolidation pattern” because it shows a time when the market isn’t sure what to do or is taking a break.
Is the inside bar pattern bullish or bearish?
The inside bar pattern does not point in a particular direction or trend. Depending on the situation in which it is used, it can be either bullish or bearish. The inside bar pattern is just a sign of a time of consolidation or indecision in the market when the price can’t break out of the range of the previous candlestick and is stuck inside.
When the inside bar pattern forms after an uptrend, it may suggest that buyers are taking a break before continuing the trend. After a downtrend, the inside bar pattern may signal sellers taking a break before continuing the downtrend, which is bearish.
It is important to remember that the inside bar pattern cannot predict the direction of the following price move.
Traders should always look at other technical analysis tools and factors, like trend lines, support and resistance levels, and market sentiment, to confirm the direction of the next price move.
The inside bar trading strategy: How does it work?
The inside bar trading strategy is a simple but powerful way to trade. Traders look for inside bars on their price charts and use them as potential trade setups. Usually, the plan has two main steps:
Step 1: Identifying inside bars
On price charts, traders must identify the inside bar. An inside bar occurs when the high and low of the current candlestick fall within those of the previous candlestick. It’s important to keep in mind that the inside bar can be any size in this strategy, small or big.
Step 2: Trading inside bars
When traders see an inside bar, they look for a breakout either way. A breakout is a price movement that breaks above or below the inside bar. This breakout is a sign to enter a trade.
Traders purchase if the price breaks above the high of the inside bar. On the other hand, if the price breaks below the inside bar low, traders sell.
How to trade inside bar pattern
When trading the inside bar pattern, you have to wait for the inside bar to break out of its range, which could mean that the trend will continue or may reverse. Traders can trade the inside bar pattern in several ways, depending on their risk tolerance and trading style.
Here are three typical ways to do it:
Breakout trading strategy: In this strategy, traders wait for the price to break out of the range of the inside bar in the direction of the current trend.
Once the breakout happens, traders can make a trade in the direction of the breakout by putting a stop loss below the low of the inside bar for bullish breakouts or above the high of the inside bar for bearish breakouts. The goal of this strategy is to take advantage of the momentum of the trend.
Pullback trading strategy: After a breakout has happened, traders wait for the price to pull back to the range of the inside bar. Traders can then enter a trade in the direction of the breakout by putting a stop loss below the low of the inside bar for bullish breakouts or above the high of the inside bar for bearish breakouts. This strategy takes advantage of price drops after breakouts to catch the trend.
Range trading strategy: In this strategy, traders are more cautious and wait for the price to break out of the range of the inside bar either way before entering a trade. Traders can enter a trade in the direction of the breakout by putting a stop loss below the low of the inside bar for bullish breakouts or above the high of the inside bar for bearish breakouts. This approach aims to catch the breakout’s initial momentum and needs
Stop-loss orders for long and short positions are often placed below and above the inside bar, low and high. If the price goes against the trade, the trader will place a stop-loss order to limit possible losses.
Why can the inside bar trading strategy be powerful?
The inside bar trading strategy can be a powerful method for traders for several reasons:
Clear entry and exit signals: Most inside bar trading strategies offer clear entry and exit signals based on price action, which can help traders make more logical trading decisions. The inside bar breakout signals to make a trade, while stop-loss orders provide an exit if the trade fails.
Versatility: Traders can use the inside bar trading technique in a variety of timeframes and markets, making it a flexible strategy. The inside bar trading approach can help day and swing traders find trade setups in forex, equities, and commodities.
Risk management: Traders can successfully manage risk with any of the inside bar trading strategies by placing stop-loss orders just outside the high or low of the inside bar. This helps traders reduce losses if the trade doesn’t go as planned, which is a key part of making money. You can read about several other risk management methods on our other blogs that will help you protect yourself from big losses.
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