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Inside Bar Strategy

How to use inside bar strategy Official Olymp Trade Blog

Price action is one of the most effective methods of market analysis. It is the basis of the Inside Bar strategy. The following information will help you understand how it works and use it in trading.

Contents:

Interact with the dashed blue word and green spot on images to get additional details and explanations.

Inside Bar Objective, Description, and Examples

The Inside Bar strategy primarily helps detect trend reversals. Its chart formation is easy to identify and use as we examine below.

However, as with any other method, it has its limitations, and it may produce false signals. To avoid that, traders are advised to use it together with other technical analysis tools.

Using the Inside Bar strategy in combination with various indicators or other chart analysis methods helps both increase its reliability and reduce the probability of false signals.

EUR/USD Chart - Olymp Trade - Blog - 07.04.2022
Fig. 1. EUR/USD chart with an Inside Bar pattern indicating a reversal Down

On the above chart, the Inside Bar pattern consists of two candles of different color and length. The first candle’s body is longer than the body of the second. The length of their shadows doesn’t matter.

Essentially, this chart formation is similar to the classic downtrend harami pattern.


If the first long candle is green and the inside candle is red, it is a signal of a possible downward trend reversal.

If the first long candle is red and the second is green, it indicates an upward trend reversal.


Asia Composite Index Chart - Olymp Trade - Blog - 07.04.2022
Fig. 2. Asia Composite Index chart with an Inside Bar pattern indicating a reversal Up

Very importantly, the Inside Bar pattern should only be used in a strong upward or downward trend. The stronger the movement, the higher the probability that after the Inside Bar there will be a reversal indeed.

Inside Bar Price Action Method with Moving Averages

On the chart below, we used the Simple moving average with a period of 100. Setting the period should be done so that the moving average would act as a support or resistance level for the price.

EUR/USD Chart - Olymp Trade - Blog - 07.04.2022
Fig. 3. EUR/USD chart with an Inside Bar pattern

In our scenario, we can see that the price reverses downwards when it reaches the moving average. Often, if an Inside Bar pattern is formed at the moment of the reversal and the Inside Bar breakout did not take place, the signal becomes much stronger. In this case, the chance of making a mistake is almost zero, and you can confidently use the Inside Bar strategy and increase the trade value.

In the above image, EUR/USD touched the moving average twice on the way upwards and reversed. That means that the SMA continued to act as a level of resistance, but the Inside Bar pattern did not form.

Inside Bar Breakout Strategy

With the Inside Bar Breakout strategy, we look for a scenario when the Inside Bar pattern failed to work, and the trend continued. In this case, we will open trades in the direction of the current trend, such as in the image below.

Asia Composite Index Chart - Olymp Trade - Blog - 07.04.2022
Fig. 4. Asia Composite Index chart with an Inside Bar pattern

The selection shows two Inside Bar patterns that appeared on the chart. None of them made the uptrend reverse downwards. That means, none of them “worked”. A similar thing happens with the Flag technical pattern, where the price usually consolidates and "rests" several times before continuing back in the main trend’s direction.

To trade with this approach, we look for the moment when the price breaks the high of the first candle in the pattern. In this case, we open a trade in the direction of the previous trend.

Asia Composite Index Chart - Olymp Trade - Blog - 07.04.2022
Fig. 5. Asia Composite Index chart with an Inside Bar pattern and a trade opening direction
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Risk warning: The content of the article does not constitute investment advice and you are solely responsible for your trading activity and/or trading results.

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