The inside candle/inside day/inside bar (hereinafter
referred to as an inside bar) can be played when trading any markets including
forex, commodities and equities as a momentum continuation or reversal setup.
The bar is defined when it forms altogether within the price range of the
previous one. These patterns demonstrate the trading range winding tight and
point to a temporary balance between buyers and sellers.
When trading inside bars my preference is to see them in
clear trending markets (less noise) and placed at areas where the order flow
"could" be in place. We never know for sure as there is no
centralised forex order book.
Great areas for these bars include:
- Support and resistance zones/levels
- Preceding a trend line breakout
- After a trend line breakout
- General pattern breakouts
- Round numbers
- Confluent areas (to be covered in a separate tutorial)
- After a reversal bar
Here are some tips on how I trade this setup:
If the price has run 300 pips before hitting one of the areas
above then there is a good chance of trend exhaustion and lack of momentum to
break out/through. If we get an inside bar at one of the aforementioned areas the
high and low of the bar will highly likely have significant order flow
interest. This can give a real momentum surge once penetrated and can help
breakout or indeed reverse from the level.
So the inside bars can be a reversal or continuation triggers.
My preference as a price action forex trader is to see these on a daily
timeframe as this gives more time for the order flow to build. People tighten
stop losses, place buy and sell orders etc and these can all provide the strong
underlying momentum I look for.
Other points to note include the following. Multiple inside
bars in succession can give an even better entry as the stop loss can be placed
very close to the entry. This obviously helps the risk-reward ratio of the trade
and can lead to greater profits. A cascading effect takes place as each bar
high/low is taken out.
I will always try to avoid trading inside bars in markets
where there is no liquidity. A 4 hour inside the bar at the Asian session will not
typically break out as hard as a 4-hour bar formed during London open. I want
to see pressure building and the order flow referenced above. I also prefer to see these on liquid
currencies and major time periods like the EURUSD daily timeframe.
In conclusion. This simple robust method can be extremely
effective when used in conjunction with an understanding of price structure
support and resistance. It could be worth your time looking into this to add
another string to your trading bow.