Talking Points:

  • Inside Bar Patterns are Easy to Identify 2 Candle Patterns
  • A Previous High and Low Will Act as Support and Resistance
  • Once Identified, Traders May Plan for a Market Breakout

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Inside bars are easy to find candle patterns that can be identified on a variety of charts. In today’s webinar we explore how to identify an inside bar, and then plan for the markets next breakout.

For this first step, traders will need to open a daily price action chart. From here the process is fairly straight forward. Traders should compare yesterday’s low and high to today’s price action. If price has not traded to a new higher or low you have found an inside bar!

From here, traders should continue to reference the previous high and low as values of support and resistance. These values are important because bullish breakouts may be planned above the high (resistance), or bearish breakouts may be triggered beneath the low (support). Remember that how you aproach placing entry orders may vary from other traders. Early entries and waiting for market confirmation both have very specific benefits and drawbacks!

Daily DXY Chart with Inside Bar

Identify and Trade Inside Bars (Webinar)

(Chart Prepared by Walker England)

Lastly, traders will need to manage risk and assess potential profit targets. Traders may opt to use a simple price action methodology or use technical indicators for this process. If you are using price action, you may elect to look for a 1X extension of the inside bar range to find initial profit targets Also, risk may be managed by placing stop orders inside of the range to create a 1:2 risk reward ratio. An indicator alternative that may be considered is the use of ATR. This indicator can be used to judge the markets current volatility, and traders may manage their exits accordingly.

Next, traders will need to time their market entries. For this step, traders need to decide if they will be trading breakouts or retracements. A breakout trader will look to buy above values of resistance in an uptrend and sell below support in a downtrend. This differs from retracement traders that will look for pull backs or dips in the trend before entering into the market. It’s important to remember that both breakout and retracement strategies have their Pros and Cons. So take some time here to pick the method that works for you. The key with any strategy is consistency!

This concludes our look at identifying and trading inside bars!

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--- Written by Walker, Analyst for DailyFX.com

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