Sep 10, 2012
An Inside Bar pattern is an AB formation, whereby a candle has all of its price action (highs and lows) inside a prior bars candle. It is called an AB formation because it consists of two candles, an A candle and a B candle. The B candle is the inside bar which is inside the A bar’s price action.
Statistically, on 1hr time frames and above, it occurs about 10% of the time and can therefore be used as a price action pattern we can trade. This article will enable you the trader to understand the importance of inside bars, and learn how they can lead to highly profitable trading opportunities.
However, it is crucial to look into the reasons for the inside bar forming from an order flow perspective so we understand why it formed and why it’s a useful price action pattern. The reasons why an inside bar pattern forms could be any of the following below;
- Price action is consolidating after a huge impulsive trend move, all before starting another impulsive with trend move
- Price action is coming up against a critical support/resistance level which shows some hesitation in the market as to whether it will continue or not
- Price action and liquidity are dropping before a critical news announcement. With nobody taking new positions, price will not have enough order flow behind it to take a direction
- Lastly, profits are being taken
Despite any of the above reasons, as traders, we should be concerned with the situations that are most likely to yield a price action trigger and a trading opportunity. From the reasons listed above, the least important is the critical news announcement. This is because the environment leading up to a news announcement is generally recommended to be avoided due to poor liquidity.
But, the other three reasons are crucial for us traders to be aware of, since through the live price action, they inform us what the market has done and indicate what it is likely to do next.
Now let’s look at a few examples of inside bars, and study how the price action leading up to them revealed information about the order flow behind them. This allowed us to make a more informed decision as to whether the next move would be impulsive or corrective, trending or counter-trend.
Looking at the chart above, we can see a strong bearish trend in place with 5 bear candles in a row. In the middle of the chart, we see a bull bar, which is actually like an inverted pin bar. This small bull bar is inside the price action of the prior bar, thus making it an inside bar. Notice how after this bull bar, the bears continue the trend. This inside bar offered us a great with trend setup to get short and take advantage of the bearsish selling pressure.
The chart below is another example of the price action inside bar pattern. But this one occurs at a critical resistance level. Look at the rejection towards the middle of the chart and then how it formed an inside bar.
Now the bulls had formed a flag pattern prior to the resistance level, already showing hesitation leading up to the resistance level. After touching the level, it then formed an inside bar showing either profit taking, hesitation, or both. In this case, trading it as a with trend setup would have failed as the pair never came back to that resistance level, and sold off for over 200pips.
Inside bars occur about 10% of the time when looking at 1hr time frames and up. When combined with the right variables, they can be highly effective price action strategies. Remember they are more accurate as a with trend strategy, then a counter-trend strategy. Also make sure to watch out for inside bars that occur after strong impulsive moves.
Through the analysis of the move leading up to the inside bar, how the tails of the inside bar form, the overall size of its body, and the price action of the subsequent bar following the inside bar, we can be able to tell the price action move and where it is likely to be next.
For those of you wanting to trade inside bars using quantitative statistics over the last 10 years, along with rule based systems, make sure to visit the Price Action Course where you get lifetime access, join a community of traders, and learn high probability price action strategies.