Understand Trader Price Action Strategy

In this blog, we will delve into a significant price action pattern known as the inside bar candle. This pattern is not only straightforward but also acts as a powerful tool in the arsenal of traders looking to make informed decisions based on real-time market dynamics.

By observing the behaviour of inside bar candles, traders can gain insights into potential market reversals and continuations, enhancing their overall trading strategy. Understanding this pattern is crucial for those aiming to navigate the complexities of the market effectively.

Table of Content:

1. What is an Inside bar?
2. The psychology behind Inside bar.
3. When to trade and when to avoid it.
4. 5 key characteristics of the inside bar candle.
5. How to trade using this price action strategy.
6. Conclusion

What is an Inside Bar?

An inside bar candle is a price action pattern that consists of two distinct bars on a chart. The first bar, often referred to as the mother bar, establishes a certain range with its high and low points. The second bar, known as the inside bar, is characterized by its smaller size, as it forms entirely within the boundaries set by the mother bar. This means that the high of the inside bar does not exceed the high of the mother bar, and the low of the inside bar does not fall below the low of the mother bar.

Inside bars can occur at various points in the market, including at the peak of a bullish trend, the trough of a bearish trend, or even in a consolidating phase in the middle of a trend. Traders often pay close attention to this pattern because it can serve as a valuable indicator for potential market reversals or continuations. By analyzing the inside bar formation, traders incorporate it into their price action tradingstrategies to gain insights into possible future price movements. Successfully identifying and trading inside bars can enhance a trader's ability to make informed decisions in the dynamic landscape of the financial markets.

The Psychology Behind the Inside Bar

An inside bar candle represents a period of indecision and market consolidation. This means the market is "taking a break" before continuing in its previous direction or reversing.

This price action pattern often forms after a strong move, giving the market time to settle before deciding its next direction.

Key points:

1. The high and low of the mother bar act as resistance and support.
2. Traders keep their stop-loss levels just outside these boundaries to manage the risk reward ratio
3. This setup can lead to good swing trading opportunities, especially if followed by high volatility.

When to Enter the Trade and When to Avoid It

To trade the inside bar candle, mark the high and low of the consolidation range as potential entry points.

1. Go long if the cost breaks above the high.
2. Go short if the price breaks below the low.

When to Avoid:

1. During a consolidation phase without a clear breakout.
2. If the market is choppy or directionless.

By following these rules, you can make the most of your price action trading strategy while minimizing risks using a good risk reward ratio calculator.

5 Important Characteristics of an Inside Bar

1. Time Frame

1. Use daily time frames or higher for better signals.
2. Lower time frames often show false signals due to market noise.

2. Works Well in Trending Markets

1. The inside bar candle performs best when the market is trending.
2. Avoid using it in choppy markets unless there's a clear breakout in the tradingprice action pattern.

3. Breakout

1. The best setups occur right after the market breaks out of a consolidation phase, continuing the previous trend.

4. Risk and Reward Ratio

1. This strategy helps limit risk compared to potential price movement.
2. Use a risk reward ratio calculator to plan trades effectively.

5. Size of the Inside Bar

1. A smaller inside bar relative to the mother bar is ideal.
2. The best setups occur when the inside bar forms in the upper or lower half of the mother bar.

How to Trade Utilizing the Inside Bar Strategy

1. Trade After a Breakout

1. Avoid trading during a consolidation phase.
2. Stay for the market to break out of the range, signaling a continuation of the trend.

2. Follow the 10-Period Moving Average

1. Use a 10-day Simple Moving Average (SMA) as a guide.
2. In an uptrend, trade long as long as the price stays above the SMA.
3. In a downtrend, trade short if the price stays below the SMA.

3. Inside Bar with Narrow Range

1. Look for an inside bar with the smallest range in the last four days.
2. This indicates low volatility, often followed by a significant market move.

Conclusion

The inside bar candle is a simple yet effective trader price action trading strategy for identifying market trends. However, it's essential to determine that no strategy is foolproof. For example, the Hikkake pattern can indicate a failed price action pattern. If the inside bar breaks the opposite range within 2-3 bars, traders should closely monitor and adjust their positions to minimize risks.

By using the inside bar candle wisely and maintaining the risk and reward ratio in check, you can improve your trading results. Remember to use tools like a risk reward ratio calculator to plan your trades effectively.