Trading Forex with Inside Bars
Inside bars are rightfully considered one of the best strategies for Forex trading. The reason for this is the relatively small stop losses, in comparison to countless others, this strategy provides due to its risk-reward ratio. Inside bars can serve as your gateway to marvelous trading opportunities. Therefore, we want to describe in detail what it exactly is and how you can use it to your advantage.
What is an Inside bar exactly?
Inside bar is a sequence of bars within a range of something called the mother bar. The bottom point of the inside bar is above that of the mother bar, its top is beneath accordingly. If you take a look at a chart with a narrow time frame (like a day), you will notice that it often takes up a triangular shape.
An important thing to note is the fact that the bar can sometimes remind a potential bolt signal. Professional traders advice to enter the bar only on the tipping point of the top or bottom of the previous bar. What this means is that, for example, if you are looking to buy, you should open a position above the mother bar high. Following the same logic, you should open a position below its low, in case you are looking to sell.
There are many ways you can go about it, but we are going to cover the case of an inside bar contained between the top and bottom of the bar it follows. You can also stumble upon cases of an inside bars sequence within the scope of a single mother bar. If you see a chart formed by a bar sequence winding up within the scope of the preceding bar, you have grounds to suspect a bolt coming.
What does the Inside bar mean?
An Inside bar can be interpreted as a sign of an approaching movement reversal or continuation. They can also serve as identification of consolidation or uncertainty, which are often followed with huge directional movement. They are present in serious turning and decision points. All of this can be used to your advantage.
Being able to identify inside bars is useful for determining a place to join or exit a trade. It is not that hard to learn to recognize the continuation signals, so we consider this something each beginner trader should learn to do to apply in their early stages of trading. Once you have become competent in that, you can confidently take a step towards working out the turning points indicators.
What to do next?
There are two ways you can go about trading once you set up an inside bar. The result is either a continuation or a reversal signal. The first one usually ends up in a prolongation of the momentum preceding its formation. Such inside bars tend to result in bolts that fit the ongoing trend and the approaching momentum. To sum it up, there are two respective stop loss positions for inside bar strategies. It is necessary to study each of them in order to learn how to make a decision regarding which one should be applied to the inside bars you are trading.
The most common setup would be applying stop loss exactly above or beneath the top or the bottom of the mother bar accordingly. There is no need to calculate the precise distance each time, going with 1 pip will suffice for either case. As practice shows, a few pips will not make a huge difference to the outcome of the trade.
One other setup you should look into is the middle of the mother bar. This is usually applied whenever the bar is rather big. However, it is not recommended to use setups with such mother bars, especially with little experience. The more narrow the mother bar is the more compression it represents. This allows for expecting a bigger potential bolt.
Continuation signals
One of the best moments to apply inside bars is whenever you see a substantial trend in progress or a pause in a long-term steady movement towards one certain direction. You can apply the bars on a specific trend of a 3-4 hours chart, however, it is recommended to use them for daily charts, especially if you’re just starting out. Once you gain some experience and learn all the ins and outs of the strategy, you can switch things up. It is completely okay to stick with the inside bars as your go-to strategy for daily charts.
Reversal signals
Once you are confident with identifying the continuation signals, you can try out the reversal signals. It is strongly advised to leave this method for later when you have some experience, as it requires more understanding and thorough analysis of the chart. The best time for Inside bars.
Inside bars are perfect for daily charts. The reason for that being the fact that smaller time frames result in the bars growing so much they are not really worth trading. You can often come across strings of inside bars continuously growing before breaking out on a 1-3 hours chart. Trying to open a trade based on these charts can end up in a lot of confusion as there are too many mixed signals involved in a chart this small.
As with anything else, of course, wisdom comes with experience. If you find this method convenient after working with daily charts for a while, go ahead and apply whatever you find most useful. But make sure to stick to the guidelines offered by professionals, if you are only starting your Forex trading journey.
All in all, inside bars are a great way to go about your trading strategy. There are quite a few methods to use them, which one is the best is the decision you will have to make for yourself based on your preferences, goals, and experience level. Don’t dive into the most complicated strategies right away, but don’t shy away from them once you get a hold of the basics.
