Double Inside Bar Trading Strategy

If looking to enter this trade you could set your entry for when price breaks out higher and the pattern is confirmed. Each high or low of a candlestick represents, at least in the short term, an area of support or resistance. In this double inside bar example, you would have been break even on the trade. The double inside bar strategy takes advantage of a slightly longer term consolidation in the market. A saying that goes “the bigger the brick the bigger the break” describes what we expect for a double inside bar break. For example, if moving average breakout happens in a bearish direction then inside breakout must happen in a bearish direction.

To spot this pattern on your chart you are looking for three candles. It is not a complicated setup to trade but there is one trading tip I will give after a simple example. Perhaps the most popular (and less controversial) location for inside bars is considered to be at non-threatening pullbacks to dominant trends. By non-threatening pullbacks we refer to brief periods of price movement back into the trend as opposed to an extended move that may be characterized as a mini trend in itself. Analyzing volume during the formation of an Inside Bar can provide additional insights.

The most versatile indicator — Ichimoku

When inside bar forms after an impulsive wave then it wants to convey a message to traders that the market is deciding its future direction either to go up or down. Breakout of the inside bar tells us the future direction of the market that big traders or institutions have decided. Setting stop losses can also vary between aggressive versus conservative traders. Risk averse traders will usually prefer to place the stop loss beyond the high or low of the candlestick preceding the inside bar – that is, the candlestick that the inside bar is inside of. This is to provide a meaningful buffer to a potential trade and avoid being ‘whipsawed’ out of the market through using a stop loss too tight and aggressive. However, as we saw in the examples above, it does not guarantee profitable trades.

• The image illustrates an inside bar on the graph, followed by a Hikkake pattern.
• We can see a strong downside move occurred as price broke down past the inside bar’s mother bar low..
• One way to think of an inside bar is to compare it to a volcano, where pressure is building underneath before an eruption.
• Some traders use a more lenient definition of an inside bar that allows for the highs of the inside bar and the mother bar to be equal, or for the lows of both bars to be equal.
• These ideas are helpful not just for this setup but for assessing any trading strategy.
• Most forex traders look continuously for profitable day trading or swing trading strategies.

There are certain parameters/criteria that filter out the best inside bars from the crowd. If the inside bar pattern meets those criteria, then it will give you a winning trade. If inside bar forms within a ranging market structure, then it will surely not work because it does not make any sense of trend reversal. Here we picked a random chart and plucked 14 inside bars that are technically valid – that is, they fall within the range of the candlestick prior to them.

Inside Bar

Breakout of inside bar candlestick decides the future direction of the market. In essence, we are referring to the candlestick that the insides bar is inside of and potentially other immediately preceding candlesticks. However, at major support and resistance levels the indecision represented by inside bars can also be very telling, and in some cases a viable trigger for a reversal trade as well. In the above example after the closing of the second candle you could validate the presence of inside bar candlestick pattern. Once the pattern is validated the price indeed reversed its direction and moved upwards.

Whilst you can find and trade this pattern on all time frames, the 15 minute chart and higher will tend to work better as the price action picture is clearer with less noise. The double inside bar is a series of candlesticks where price forms back-to-back inside bars. Our double inside bars are short term consolidations and we can expect that when they break, the odds are they will reach the high or low of the mother bar. We need momentum (strong imbalance of buyers or sellers) to break the support or resistance level of the inside candle.

Double Inside Bar Trading Strategy Details

One idea is to demand that the breakout bar closes beyond the range of the inside bar. This example shows the value of examining a pattern manually with its underlying concepts in mind. While it’s helpful to mark out price patterns with the help of software, it’s crucial to analyze them manually for more insights. To be clear, the arrows in the chart below point to the last bar of each three-bar inside bar pattern. Since this approach seeks to enhance the inside bar, let’s recap this basic pattern before moving on to the main star of this guide.

If the high of the inside bar breaks before the low point, then you must delete the sell stop order immediately. The inside bar breakout means the break of high or low of inside bar candlestick. Most forex traders are trend traders and follow the trend using…

Does Trend Matter?

As discussed earlier, as long as the first candle covers the first candle, it is an inside bar pattern. Note how the price continues to trade higher after the appearance of the inside bar pattern and the confirmation of the third candlestick’s formation. The only thing that matters is whether the mother bar is bullish or bearish. The formation of the mother bar, in combination with the trend, is what tells you which way to trade an inside bar setup.

• Instead, it would be best to interpret the pattern differently on the market scenario and decide the next price direction.
• We’re also a community of traders that support each other on our daily trading journey.
• In this case, price had come back down to test a key support level , formed a pin bar reversal at that support, followed by an inside bar reversal.
• Each and every strategy needs to be accompanied by a favorable risk to reward ratio.

As common as this saying may be, it has never lost its significance in the financial markets, especially when it comes to trading inside bars. Inside bars are a valuable indicator of a breakout, but inside bar candlestick traders can never guarantee that the price will break the way they’ve predicted. A stop-loss order should always be placed on any trade that relies on an inside bar to identify price consolidation.

An inside bar that forms on the higher time frame has more “weight” simply because the pattern took more time to form. This means more traders were actively involved in its formation, which as a result equals higher capital flows. First and foremost, the time frame you use to trade inside bars is extremely important.

Conservative traders should consider buying the EUR/USD when the price action closes the next candle above the upper level of the range. Aggressive breakout traders would consider buying when the price reaches a few pips above the inside candle high. In either case, your stop should be located below the bottom of the range as shown on the image.

This is the kind of momentum you want to look for when trading this strategy. Finally, pay attention to the size of the inside bar relative to the mother bar. In general, a smaller inside bar relative to the preceding bar is a stronger indicator of consolidation ahead of a breakout.

Remember that an inside bar represents consolidation after a large move. This is what makes these patterns so lucrative – the fact that we are trading a breakout after a period of consolidation. Therefore the tighter this consolidation is, the more volatile the ensuing breakout will be. Of course, this isn’t always the case, but in my experience, it holds true more often than not. In this lesson, we’re going to discuss the five characteristics of a profitable inside bar setup.