Here is another chart pattern that appears quite regularly and can be quite an addition to any one’s trading arsenal. What makes this pattern so appealing to me personally is the fact that it gives a very low risk entry point. It can preclude some huge market moves and with such a low risk the rewards can be huge if managed correctly.
An Inside Bar signals falling volatility and market indecision. The current bar’s range is within the previous bar’s range. Another way of saying the same thing – an inside bar has a low greater than the previous bar’s low and a high less than the previous bar’s high. This market indecision can and does regularly supply the trader with the information that the market may be about to reverse.
This pattern can be traded on any time frame but as always the lower the time frame expect a lot more whipsaw. This pattern will complement any trading system or method. It is another pattern that supplies the trader with both a low risk entry point and secondly supplies the trader with a logical place to put a stop.
As with all candlestick patterns this should not be traded in isolation. When traded using a trend filter like a moving average this can be a extremely profitable pattern. Another way to play this pattern could be with an oscillator and take breakouts when the oscillator is overbought or oversold. Lets look at some examples of these two scenarios and where we would place our stops.
This next chart shows a great example of how to trade an inside bar using the stochastic oscillator to indicate when price is in the oversold zone to confirm the trade. In this example you would simply trade the breakout to the upside of the Inside Bar Candlestick. To do this you place a buy stop order a few pips above the high of the Inside bar. There is two places that you can place your stop, the first and in my opinion the best place to put your stop is a few pips under the low of the Inside Bar. The reason I say this is two fold, firstly it offers the lowest risk opportunity and secondly the best trades go your way straight away and don’t look back. The advantage here is that when this happens you have your best position size on and there for the greatest profit potential.
The second place you could place your stop is below the low of the previous and larger candle. This may appear to be the safer option but as stated previously the best breakout trades go your way straight away and all this stop does achieve is it gives you a larger stop and thus less position size on the trade. This is an individual thing and you should trade what you feel most comfortable with.
This next chart is a daily chart of the EUR/USD. In this chart I have highlighted some Inside Bars that could have been taken as a trend trade. In this scenario you would be looking to add positions as the trend continues and look for an Inside bar in a retracement with the assumption that this will signify a reversal in price and the resumption of the original trend. This is an excellent trading style that allows you to build large positions in a good trend.
Note how in the chart I have placed all the stops just below the low of the Inside Bar Reversal itself and all these stops have held there ground and were not stopped out. In the above situation you would be able to put on relatively large positions due to the small stop sizes presented buy the Inside Bar setup. As always money management plays a major role in all trading and is a subject all on its own. If you have never looked at Inside Bars then maybe you should, check them out and see whether they could complement you’re current methods.
This is just one great reversal pattern, another is the Pin Bar. Read this post and add another great reversal pattern to your trading arsenal the Pin Bar.