Inside and outside bars in trading – how to read and trade

Методы и инструменты анализа

Inside and outside bars in trading – how to read, decoding. One of the simplest strategies in the market is inside and outside bar trading. They are easy to find on the chart, the risk is clearly understood, and signals are worked out well on large timeframes. The indoor and outdoor bar is one of the most popular Price Action models. A trading strategy can be built both on the “pure” application of the inside and outside bar, and using filters. They can also be used as an additional signal in other strategies.
Inside and outside bars in trading - how to read and trade

What is an inside bar

An inside bar is a pattern consisting of two candles, one of which (signal) is completely in the body of the other (mother). It is found in a trending market. in lateral movements, channels, they can end a long trend.

The appearance of an inside bar should make the trader tense, this is a signal for a possible reversal or trend strengthening.

Inside and outside bars in trading - how to read and tradeIt does not matter the color of the mother and signal candles. If one of the extremums of the signal candle coincides with the low or high of the mother bar, and the opposite end does not go beyond the mother bar, this will also be an inside bar. If the signal candlestick is at least one pip outside the parent one, then it will no longer be an inside bar. In some cases, it is difficult to understand whether the inside bar goes beyond the price range of the mother candle. You need to move the mouse over a candle or bar, an information window will appear with data on the minimum, maximum, closing and opening prices.
Inside and outside bars in trading - how to read and tradeThe logic of the pattern is simple – there is a strong movement in the direction of the trend on the mother candle, it meets resistance and the movement stops. There is no movement in the opposite direction, the market freezes. The stop can be not one candle, but several – a double or triple inside bar.
Inside and outside bars in trading - how to read and tradeThere are reversal inside bars and trend continuation. If the price range of the inside bar is less than 50% of the mother candle, this is an inside bar for a continuation of the trend. Reversal inside bars show the intention to go in the opposite direction more clearly. One of the next few candles, the reversal inside bar breaks in the direction opposite to the direction of the mother candle.
Inside and outside bars in trading - how to read and trade
Inside and outside bars in trading - how to read and trade

What is an Outside Bar

An outside bar is a candle that completely covers the price range of the mother candle. Candlestick extremes are allowed to coincide.
Inside and outside bars in trading - how to read and tradeOn smaller timeframes, the outside bar is a diverging triangle. Usually this is a signal of high unpredictability of the market, it is a signal to reduce risk (if the trader is in a deal) or to exit the position.

Inside bar trading strategy

When viewed on smaller timeframes, inside bars (especially 2 or 3 bars) look like converging formations, often in the form of a triangle. When an inside bar appears on large timeframes (day, week), it is recommended to switch to lower periods and monitor the breakdown of the triangle (ascending or descending).

Reversal trading

  1. We find an inside bar, its price should be more than 50% of the mother candle. Only bars at the top or bottom of the movement are considered – we are looking for a reversal.
  2. A stop order is placed slightly below the extremum in the opposite direction from the previous direction.
  3. After the order is triggered, a stop is placed behind the extremum of the inside bar or the breakout candle.

Inside bar trade (continuation)

  1. The user is in a position, sees a large candle in the direction of the deal.
  2. Identify an inside bar.
  3. The price range of the inside bar must be less than 50% of the mother candle.
  4. The stop loss moves to the low of the inside bar (if we are long).
  5. A long order in case of breakout of the extremum is placed several pips above the high.

If the trend continues, the trader increases his profit, and in case of a reversal, he takes the profit and prepares to enter a reversal. The inside bar is a figure of uncertainty, the participants are not sure about the further movement. The breakout of an extremum means determining the direction, so when the breakout is in the direction of movement, the price accelerates. But the breakout is not always true, there are false breakouts, the price consolidates near the inside bar. The trader always knows exactly where to place a reasonable stop (after the price is reached, holding the position loses its meaning) and limits losses in case of an erroneous entry.
Inside and outside bars in trading - how to read and trade

Filters

A trader can enter a position more confidently if he receives additional confirmation. As a filter for inside bars can be:

  • trend lines – it’s good when the inside bar is part of some other model in a given direction;
  • moving averages – a trader considers long trades only if an inside bar is formed;
  • oscillators – MACD, stochastic, RSI – the inside bar is considered only in overbought and oversold areas;
  • divergence and convergence – inside bars are considered after the appearance of a divergence between the indicator and price readings.

Outside bar trading strategy

Inside and outside bars in trading - how to read and tradeAn outside bar appears during periods of increased volatility. If you look at smaller timeframes (m5 up to 1 hour). It is better to enter the market during periods of low volatility – you can put a small reasonable stop. If an outside bar occurs when the trader is already in a position, it is recommended to move the stop loss to breakeven and wait for the situation to develop.

It is not recommended to enter a new position when an outside bar appears. During such periods, the foot breaks, it is extremely difficult to put a short stop.

Inside bar indicator

A trader must monitor many indicators at the same time. Therefore, some models are left without attention. To facilitate the task of finding inside bars, there are indicators. The Metatrader5 terminal uses the InsideBarSetup indicator. The algorithm marks with a red mark all inside bars on a given timeframe on any instruments. InsideBarSetup can not only find inside bars, but also generate alerts. You can set up automatic trading on the inside bar, the adviser will place the specified stop orders to enter the breakout position.

Features of trading on inside bars

When trading inside bars, there are some features that you need to consider:

  • an inside bar is a natural process of the market slowing down, after which there is a strong movement;
  • to enter positions, the trader must wait for the breakdown of the range of the inside bar and confirmation;
  • inside bars can be both reversal and showing the probability of continuation of the movement;
  • there is a price gap between the mother and signal candles in the model;
  • the figure reflects the period of consolidation in the market, by breaking through the range, the trader can understand the future direction of movement;
  • the color of the mother and signal candles does not matter;
  • the pattern signal does not depend on the color of the candles;
  • if the mother bar is 5 times or more higher than the signal one, the pattern is considered invalid. Most likely there will be a powerful rollback soon, the probability of an erroneous entry is high.

Inside and outside bars in trading - how to read and trade

Recommendations for trading inside bars

  1. It is preferable to trade patterns for the continuation of the trend, they have a higher percentage of working out.
  2. If the inside bar is a doji or a pin bar, it should not be considered for entering the market. You should also skip inside bars with very long shadows. The mother candle may have a long tail, it doesn’t matter.
  3. Do not work during the Asian session, it is preferable to trade the first half hour after the opening of Europe or during the American session.
  4. The inside bar should be small – you can put a short stop, there is no strong uncertainty in the market when stops are knocked down in all directions.
  5. Inside bar signals should be filtered by other methods – moving averages , oscillators, support and resistance levels, trend lines.
  6. You should track inside bars on large timeframes – at least 4 hours, and enter on a small timeframe.
  7. Inside bars should not be considered if the market is in a range. There must be a strong trend before an inside bar appears.
  8. Open an order only after breaking through an important support and resistance level. You should not consider inside bars hanging in the air for trading. He must have a support – forces that need to be overcome. The mother candle may not have support, but the inside bar itself must be at the resistance or support level.
  9. You can enter both on the breakdown of the mother candle, and on the breakdown of the inside bar. In the first case, the trader will have to put a large stop, but the trade is more confident. In this case, stop loss will be triggered less often. Which entry to choose, the trader decides for himself, depending on the risk appetite, experience and data from other indicators. Newcomers to the market are advised to choose the most conservative trading method.Inside and outside bars in trading - how to read and trade
  10. Stop loss should be placed behind the nearest level behind the extremum of the inside bar or the mother candle. In the first case, there will be more losing trades, but the total loss will be less. Each transaction will not cause significant harm to the deposit.
  11. It is recommended to enter at low volatility or during a strong trend.
  12. As a take profit, you can use:
    1. nearest resistance level;
    2. risk-to-profit ratio – it is recommended to place a take not less than 3 stops;
    3. fixed stop – the average number of points of the trading timeframe for the last 10-20 candles, it can be determined by the ATR indicator;
    4. using Fibonacci levels , the grid is superimposed on the first impulse, and as a target – the levels of 161% and 261%;
    5. trailing stop – fixation occurs if the market rolls back from the high by a certain number of points.

https://articles.opexflow.com/analysis-methods-and-tools/fibonacci-channel.htm How to read bars, bar-by-bar analysis in trading: https://youtu.be/_sCq053iAbA Beginners are advised to set take profit to the next level.

Advantages and disadvantages of inside bar trading

Inside bar trading has the following advantages and disadvantages. Advantages:

  • trading on daily and weekly charts takes a little time, there is time to make a decision;
  • there is a place for a reasonable stop – the risk is limited and understandable, and the profit can be impressive;
  • if the inside bar breaks through against an open position, this is a great place to take profits;
  • it is possible to make a reversal trade at the top of the market or use the pyramiding strategy when trading with the trend.

Flaws:

  • the reversal pattern often has a high risk (long stop), the trade ends with a loss;
  • in some cases, it is difficult to determine a false breakout of an inside bar, this requires experience.

The inside bar, along with other Price Action patterns – pin bar, miraboso, trend lines and technical indicators is a powerful trading tool. When trading inside bars on a daily chart and refining the entry on m5-m15, a trader can make trades with a ratio of 1 to 5 or 1 to 10 or more. It is important to correctly interpret the inside bar and filter out false signals.
Inside and outside bars in trading - how to read and tradeThe inside bar is only at first glance a simple figure to interpret. Well-executed inside bars don’t show up very often on the chart, so don’t look for them where they don’t exist. If there is no confidence, then it is better not to enter the market. It is recommended to mark the direction of the inside bar, as it sometimes suggests the direction of the price. It is best to enter the trend, although there are cases when the inside bar gives rise to a new trend. See the ratio of the price range of the mother candle and the inside bar. If the mother candle is large, it is recommended to look for reversal trades. Do not look for signals in the sideways. There must be a directional move before the pattern appears. When trading intraday, you should trade in the American session. You should not trade if the inside bar has long shadows – doji or pinbar.

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