What is the Inside Bar?
The Inside Bar is a candlestick whose whole dimension is contained within the dimension of a previous candlestick.
It is a candlestick pattern that comprises first the mother candlestick, then the inside bar(s).
The high and low of the first or mother candlesticks define the upper and lower limits within which the inside bar(s) must be found.
If any part of the next candlestick after the mother candlestick sticks out of the high or low of such first candlestick, then that next candlestick is not an inside bar.
Both the mother candlestick and the inside bar can either be bullish or bearish.
That is, given the condition of the inside bar being within the high and low of the mother candlestick is met.
So many traders have used the inside bar to formulate trading strategies which have earned them huge profits.
Any strategy which revolves around the inside bar setup is called the inside bar strategy.
In this post, I will show you exactly how to make money trading the inside bar strategy.
Trading the Inside Bar Strategy.
Here is how to trade the inside bar strategy:
Identify the Inside Bar.
The first step in trading the inside bar strategy is to identify the core candlestick pattern.
We mentioned that for there to be an inside bar, there must first be a mother candlestick.
So in essence, if you consider any candlestick to be an inside bar, look at the candlestick right before it.
Does that candlestick you consider an inside bar tend to remain within the limits of the highest high and the lowest low of the previous candlestick?
If yes, then you have just spotted an inside bar.
If no, then consider looking elsewhere because you have no inside bar yet.
Note that inside bars may be several, but consider the very first clear one, which must remain within the dimensions of the mother candlestick.
Draw a Range.
Do you see that candlestick you have spotted as your inside bar?
Forget about the mother candlestick now and let us focus on the inside bar. That is where our next business is.
About drawing a range, what is a range?
A range is a channel of price movement, comprising one or more candlesticks.
In this case, we are going to draw a range comprising one candlestick, the inside bar.
Where are we drawing the range?
Locate the highest high of the inside bar and draw a horizontal line.
Similarly, spot the lowest low of the inside bar and draw another horizontal line.
That way, you will have drawn the required range for this purpose. You can then proceed to the next step.
Set Up Buy Stop and Sell Stop pending Orders.
After drawing your ranges, you are anticipating a breakout in either direction.
The breakout will occur either upwards above the horizontal line at the high of the inside bar, or downwards below the horizontal line at the low of the inside bar.
The only way to deal with situations such as this is by the use of buy stop and sell stop pending orders.
This is because a breakout upwards will activate the buy stop order while a breakout downwards will activate the sell stop pending order.
Afterward, you can move swiftly to close the inactive pending order.
So what next?
Place a buy stop pending order at the horizontal line drawn at the high of the inside bar.
Its stop loss should be at the horizontal line drawn at the low of the inside bar.
Similarly, place a sell stop pending order at the horizontal line drawn at the low of the inside bar.
Its stop loss should be at the horizontal line drawn at the high of the inside bar.
Wait for Breakout.
The purpose of drawing a range in this set up was in order to identify a range out of which a breakout shall occur.
We have said in other posts that a breakout is only one if there has been a price range.
Therefore, the range in this matter is within the high and low of the inside bar, which may be a 1-day candlestick representing 24 hour other candlesticks.
You have also set up a buy stop and sell stop pending orders.
You anticipate a breakout to occur in either direction, activating either of your orders.
Close the Inactive Pending Order.
Did the breakout occur upwards activating your buy stop pending order?
Then close the sell stop pending order immediately.
If however, the breakout occurred downwards activating your sell stop pending order, close the buy stop pending order at once.
The rationale of doing this is to ensure that the price does not move to activate both orders resulting in a loss in one of the orders.
Always close the pending order not activated.
Adjust your Take Profit.
How do you determine where to place the Take Profit Order?
As for the Stop Loss, we already placed it at the high of the inside bar for sell orders and at the low of the inside bar for buy orders.
It is not easy to establish the exact level to locate your Take Profit.
That said, it goes without saying that a Trailing Stop Loss would be most suitable to lock in profits as the trend grows.
However, if you do not wish to employ a Trailing Stop Loss, you know what we always say.
At least a risk to reward ratio of 1:2.
However, the reason we emphasize a Trailing Stop Loss is that breakouts of this nature can result in huge price moves at times.
This can earn traders using a Trailing Stop Loss so huge profits and leave out those who only took a portion of the profits by fixing their Take Profit.