Talking Points:
- Inside Bars precede market breakouts
- OCOs can be used for Entries
- Use the risk management tool to determine risk percentages
Every trader should have a variety of strategies available to apply to the markets. Having multiple strategies may seem like a complication at first, but having choices can allow traders to react quickly and be able to trade a variety of market conditions. Today we will start a new strategy series by reviewing how to trade inside bars. Let’s get started!
What is an Inside bar?
Inside bars are easily identified pricing patterns that can be found on virtually any chart. The pattern itself requires some simple technical analysis, which includes identifying a series of highs and lows on a daily chart. The idea is that the current candle on the graph will not exceed the previous candles high or low, thus leaving it “inside”. Let’s look at an example.
Below we can see an example of an Inside Bar developing on a USDCAD Daily chart. Our analysis begins by pinpointing the previous bars high and low. Currently the high for the previous daily candle resides at 1.1673 while the low sits at 1.1548. It is important to remember both numbers as today’s price action should not exceed the denoted high or decline below the previous low. If price remains inside both values, our inside bar will be confirmed!
Execution
So now that you have identified an inside bar, the next question is when and how to trade them. First off, trading inside bars lends itself to trading breakouts. The idea is that the identified highs and lows mentioned above, will also act as support and resistancevalues. If price breaks above resistance, traders will look to buy the market. Conversely if price falls below support, traders will look to sell.
One way to setup for an inside bar breakout is through the use of an OCO order. An OCO order allows us to set a buy and sell entry order at the same time. Using an OCO entry is beneficial to traders, as it allows them to be ready for a breakout in either direction. Regardless of the markets direction, an entry will be pending execution! In the event that price breaks out, the OCO order will execute the appropriate entry order while canceling the other from your pending orders list. Once entry values have been determined, traders can then plan on how to exit their positions.
Determining Risk and Reward
As the final step, setting stops and managing risk is one of the most important components of any working strategy. When it comes to trading inside bars, this process can be simplified by setting your stop between your OCO orders. This means if your buy entry and sell entry are spaced 125 pips apart, as per our USDCAD example, you would set your risk at 62.5 pips.
Profit targets can also be formed in the same fashion. Traders opting to use a 1:2 Risk/Reward ratio can elect to target twice the amount of profit in pips relative to their risk. This means using the example above, a 125 pip profit target would be set.
---Written by Walker England, Trading Instructor
To contact Walker, email instructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.
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