In this article, I'm going to show you a way how to make your trades safer without having to rely on any indicator - but you will just need to look at the charts!
What Are Inside Bars?
They are bars that are within the limits of a larger, previous bar.
An inside bar is generated when a smaller bar is created with its movement's high and lows inside the previous bar. In other words, the highest price of the bar is lower than the highest price of the previous bar, and the lowest price is higher than the lowest price of the previous bar.
This is much easier to understand once it’s visualized on a chart:
Can you spot the 6 Inside Bars? I am sure you can!
Can you tell why they are inside bars? It is easy, right?
They are all well inside the limits of the previous bar!
The reason they may be confusing at first is that some people don't really take into consideration the candlesticks, which mark the highest and lowest prices (their wicks).
So, now you know what they are, but...
How Can I Use Them For Trading?
Using an Inside Bar Strategy for trading usually means going for safer trades, where both profits and losses are controlled. Also, the core of the Inside Bar trading strategy is that you trade the breakout of a low volatility period. Therefore, you use Inside Bars to place trades with stop-loss and take-profit orders.
These orders are set using the information provided by each Inside Bar. In the case of BUY trades, Stop-Loss and Take-Profits are placed as follows:
And of course, as usual - in case of SELL trades all the orders are placed vice versa.
Let's look at the previous example:
I see the Inside Bar 1 has formed, and I've noticed that the market is trending bullish since the price action hasn't diminished, so I place a BUY order with my stop-loss at the lowest price of Inside Bar 1, and my take profit is set at its Mother Bar's high.
Also when entering into the trade, I usually watch for the trend direction and when the Inside Bar is created, I place BUY stop order on the high of the Inside Bar and SELL stop order on the low of the Inside Bar.
It is usually the best to trade in the direction of the main trend, but sometimes there can be nice and profitable trades in the counter-trend direction. That is why I usually take both BUY and SELL trades - depending on which side the market breaks the range of the Inside Bar.
And if the market breaks through both its high and low, I take both trades - one of them will usually end on Stop-Loss and the second one on Take-Profit (I take both trades only if my Take-Profit is higher than the Stop-Loss - which is most of the time).
And you can see that the next bar (after the bar marked with 1) does form upwards, which is already giving me profit, and it cuts at my take-profit, giving me at least twice my investment before growing a bit more. You can see that its main body never neared my Inside Bar 1's lowest price (my stop-loss) after the trade entry.
Let's look at the rest of the bars:
Note: An option to filter out some lossy trades is to avoid trading Inside Bars without clear directional trends.
Inside Bars are very a useful, simple and effective technique - especially when combined with other patterns and strategies.
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