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Technically Speaking
Technically Speaking

Technically Speaking

This month’s lesson deals with a technical measure that you can use on any Stock, Future, and FOREX pair for any time frame, from a Daily Chart to a Tick chart. Let us investigate what is commonly referred to as the INSIDE BAR candle pattern.

The simplistic definition of an Inside Bar is when the bar in question is smaller and fully contained within the high to low range of its previous bar (including tails) which is called the ‘Mother Bar’. This means the Inside Bar cannot have exceeded the highest high price of the Mother bar and its low also cannot have gone lower than the lowest low of the previous bar at any time for the duration of the bar.

Typically, the Inside Bar is often defined as a moment of indecision amongst trader’s, and is watched particularly near the possible completion of either Bullish or Bearish trends. By watching your MACD signals and loss of momentum, when an Inside Bar appears, the antenna on your radar should start to get warm.

Many trading platforms have the ability to track multiple Inside bar patterns, and you can set an alert for the appropriate time frame you are watching. If you can’t locate this feature on your trading platform already installed, ask their support staff how or if it can be applied to your charts.

The very next bar after you see an Inside Bar alert, it is suggested to take the trade in the direction of the price action break from the Inside Bar. In other words, if price action rises above the highest high of the Inside Bar, take a long position, and if price action falls below the lowest low of the Inside Bar, take a short position.

Place a stop for your trade a couple of ticks beyond either the opposing high or low of the ‘Mother Bar’ (not the Inside Bar) in order to protect yourself against reversing trades.

As price action continues and your trade exceeds the high or low of the Mother Bar, the pattern is ‘confirmed’, you should be profitable, and you should now consider moving your stop to your entry point in order to eliminate any chance of a loss, should the trade suddenly reverse and go against you.

By utilizing longer time frames (60 minutes and up) for analysis, often provide the best (although fewer) signals for the highest percentage of pattern completions. Smaller time frames (10 minutes or less) are subjected to risky wild price action swings, negating many displayed patterns within minutes, and providing a much lower percentage of completion rate. Patience is key when working with Inside Bars, but they can also provide many profitable opportunities when properly analyzed, and excellent entry points for your trades.

There are no set rules for expected price targets, but a good rule of thumb for an initial target would be by taking the length of the inside bar and multiplying it by a factor of 2.5 taking profits at that level, and again moving your stop accordingly for maximum gain.

As an example, you are trading the EUR/USD currency pair and your Mother Bar is 20 pips in length (including tails). Your Inside bar is 12 pips in length. 12 pips x 2.5 = 30 pips. Again, your results are determined by your personal levels of Risk and Money Management, and of course price action.

It is highly recommended with any new trading signal to track prior price action movements before jumping into the market. Examine trading scenarios by using different time frames, to determine which might work best for your personal taste.

Remember, always use a demo account to plan your trading strategy, and wishing you the best of luck with your trading using this information.


Contributed by MartyMT.

October 2012


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