Inside Bar Breakout Strategy – How to Select the Best Inside Bars

In our ‘What is an Inside Bar’ article, we wrote about the inside bar and its importance as a price action strategy which can offer great trading opportunities. Although this is true, not all inside bars are equally effective or profitable to trade.

To review what an inside bar is, here is a review of the inside bar pattern;

An insider bar is a candle that is completely inside the previous candle. To be more specific, the entire price action of the inside bar, (including the tails/wicks) are also inside the previous bar.

This means inside bars are what we call AB formations, meaning they consist of an A bar and B bar.

Inside bars are more common on time frames of the 1hr chart or less, but quantitative analysis suggests they are statistically less accurate. However, above the 1hr charts, inside bars as a whole statistically have a lot more accuracy as a strategy.

Generally, inside bars occur about 10% of the time (of all bars), and are a distinctive price action pattern. Although they are effective as a reversal strategy, they are far more effective when traded as a breakout strategy with trend.  In addition, they can also lead to a breakout when they occur at critical support/resistance levels.

Below are a few among reasons from an order flow perspective why inside bars form:

  • Price is consolidating after a large up/down move before starting another with trend move
  • Price is coming up against a critical support/resistance level which shows some hesitation in the market as to whether it will continue with trend or not
  • Price action and liquidity are dropping before a critical news announcement. Thus, traders are reducing positions while new ones are not entering the market.  This lack or reduction in order flow can often cause a small bar, possibly an inside bar
  • Profits are being taken on a current trending move

As a whole, critical news announcements naturally drain liquidity before the event.  Hence, when an inside bar forms prior to such an announcement, it has less importance because it’s a more natural phenomena.

The good thing about an inside bar is it gives us traders a great chance to get into trending moves. How many times have you wanted to participate in a trending move, but have not been able to get a pullback setup?  Inside bars often offer us a great opportunity to take advantage of a strong trending move.

However, you still cannot trade all inside bars the same as they are not equal.  Therefore, our goal as traders must be to determine whether the inside bar is occurring with trend or counter-trend. As we said before, inside bars function better as with trend setups, so best to look for these during a key trend or impulsive move.

An example below is on the GBP/USD 4hr chart. We can see the trend which is clearly to the upside, meaning the bulls are in complete control.  During this time, virtually no bear bars are printed during a 300 pip climb.

But notice in the middle of the chart, we have a bear bar, followed by a blue inside bar. Both of these bars are really inside the range of the bull bar 8hrs prior.  The fact that a bear bar, followed by a bull bar, then another bear bar (indecision) was unable to take out the lows of the last strong bull bar, tells us the bulls are still in control.  This offers us a great with trend setup using the inside bar strategy.

After the last bear bar, price action climbs for another 250+pips, offering us a great with trend setup.

Inside Bar Breakout Strategy image

 

In Summary
It is important that we realize how best to use the inside bar strategy as it will show up in with trend and counter trend opportunities.  We must realize we cannot trade every inside bar the same way, since they signify many different things from a price action and order flow perspective.

However, there are ways to trade them as a high probability strategy. We actually have compiled over 10+ years of quantitative data on inside bars across almost every pair and time frame.  Having this statistical data not only gives you information on expectancy, but also allows you to exploit the edge inside bars can off.

If you would like to access this proprietary quantitative data on the inside bar setup, along with other high probability price action setups, then check out the Price Action Course where you can learn how to trade the inside bar strategy with consistency and accuracy.

In addition to getting access to these strategies, you also get lifetime access to the course, dialogue with a community of traders in the traders’ forum, free updates, live trade analysis, and more.  To find out more about this price action course, check out the link above, or visit 2ndSkiesForex.com.