Inside Bar Strategy

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The Inside Bar strategy is used to trade trend reversals. The strategy is based on the double-candlestick formation known as the Inside Bar, which is made up of a long candlestick (bullish or bearish) and a shorter candlestick which is “inside” the long candlestick (the short candlestick has a higher low and a lower high relative to the long candlestick.

Inside Bar

The appearance of this formation at either side of the price extremes is usually a signal that a market reversal is about to occur.

Time frame: This strategy can be applied on any time frame.

Indicators: The indicators used for the Inside Bar strategy are:

The Stochastics oscillator detects oversold and overbought market conditions, so the strategy is to identify when the inside bar candle formation occurs at either end of the market when the asset is oversold or overbought.

Long Trade

  1. Wait for the Stochastics oscillator to cross at a level between 0 and 25, showing that the market is underweight/oversold.
  2. Watch to see that the market action is located at a region where there is a support (S1, S2 or S3 as shown by the autopivot calculator).
  3. If the Inside bar formation occurs when the market is oversold and the price of the asset is at a support level, go long at the open of the next candle.

The signal is stronger if the first candle in the inside bar formation is bearish and the second one is bullish, and also if the candle used in making the trade entry opens at the high of the day 2 candle or gaps above it.

Chart showing long entry setup

Chart showing long entry setup

In the chart example above, we see the inside bar formation forming at a support level (corresponding to S2 on the chart for the day in question), and at a time that the Stochastics oscillator crossed at an oversold region (at 20). The conditions for the long trade were thus fulfilled and we see the asset moving higher, corresponding to the trade signal.

Stop loss is set at a few pips below the inside bar formation (between 20 to 50 pips depending on the chart used), while the trade is closed if the opposite signal appears, or when price reaches a resistance level.

Short Trade

  1. The lines of the Stochastics oscillator must cross at a level between 75 and 100, showing that the market is overweight/overbought.
  2. Watch to see that the market action is located at a region where there is a resistance (R1, R2 or R3 as shown by the autopivot calculator).
  3. If the Inside bar formation occurs when the market is overbought and the price of the asset is at a resistance level, short the currency at the open of the next candle.

The signal is enhanced if the first candle (Day 1) in the inside bar formation is bullish and the second one (Day 2) is bearish. Also if the candle used in the trade entry opens close to the low of the Day 2 candle or gaps below it, the signal is reinforced.

Chart showing short entry setup

Chart showing short entry setup

The chart setup above shows the situation for the short trade. Here, the inside bar candle formation occurred (with the Day 1 candle bullish and Day 2 bearish), at a time that the Stochastics oscillator crossed at a value greater than 75, and both situations occurring at the R1 point as calculated by the autopivot calculator. The currency pair responded to the signal and traded lower.

Stop loss for this trade is set to between 15 to 50 pips (with the larger stop being used for a longer term chart setup) and profit target is set to close the trade if the currency hits a strong support or a reverse signal appears.

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About Author

I am a forex analyst, trader and writer. I have had a career writing articles for websites and journals, starting in the travel sector and then in Forex. I use a combination of technical and fundamental analysis in my forecasting. When I joined Forex4you in 2010 I thought it was a great opportunity to work as an analyst for an international broker. I provide technical forecasts with clear entry points and targets as well as articles on fundamental and trading themes. Good luck and happy trading!