Introduction: The underlying concept of Inside Bar Breakout Trading Strategy is based on the process of accumulation and distribution which is also known as consolidation at key support and resistance areas respectively by big players and then the breakout thereof.
This article comprehensively deals with the various aspects of trading breakouts of Inside Bars from a daily chart perspective. Hence wherever we mention of an “Inside Bar” in this article, it essentially means an “Inside Day”.
It is one of the simplest but an outstanding strategy if traded with proper guidelines.
Meaning
An inside bar is said to have formed when entire bar’s price action range i.e.: Open, Low, high and close takes place within the high and low of the previous bar/day. To put it in more simple words, we say, an inside bar is in place when the highest price is lower than the preceding bar’s high, and the lowest price is higher than the preceding day’s low. The Inside Bar Breakout Strategy gets the distinction mainly due to the simplicity of application and huge reward it offers compared to the amount of risk undertaken.
Anatomy of an Inside Bar
For the better understanding of an Inside Bar, its structure and its precedence, you can see the illustration below.
As we can understand from the illustration below, the high and low of bar B; an “Inside Bar” is contained within the high and low of bar A, a “Preceding Bar”, respectively.
Illustration 1: Anatomy of an Inside Bar
Why Inside bars occur
Inside bars occur in the following circumstances
A. Reversal
Key resistance area: At a point of strong resistance, big time sellers start building short positions and the buyers start covering their longs. This activity of exchange of hands takes place in a small range of price area which leads to a remote activity resulting in an inside bar. Such key resistance or support area can be a big round number, a fib level, a trend line or a confluence area.
In the below illustration as we can notice, after a prolonged up move price goes for a retest at a key resistance area and forms an Inside Day. The breakout downside leads to steep reversal.
Illustration 2: Inside Bar at a key resistance area resulting in strong reversal.
Key support area : It is exactly the vice versa of the above noted activity and in this case at a strong support area big time buyers start building long positions whereas the sellers start covering their shorts. Such an action of exchange of hands in a remote range leads to an inside bar.
As one can notice in the illustration below, An Inside Day occurs at a key support area. Once the high of that Inside Day is taken out price rallies with heavy momentum.
Illustration 3: Inside Bar at a key support area resulting in strong reversal.
Breakout area
An area of key resistance or support gets broken only when there are a large numbers of players willing to bid above or offer below such key areas respectively. Hence, before a strong breakout, there is a period of remote activity or consolidation wherein the sellers/buyers respectively build their positions for an upcoming breakout. It is common to have Inside Days in those consolidation areas before a strong breakout of key resistance or support.
In the illustration below multiple Inside Days show the process of accumulation before the price breaks the key resistance area.
Illustration 4: Inside Bars forming at a breakout area and then the price breaking the Key resistance with momentum.
C. Consolidation after a strong move in a single direction:
When the price makes a substantial move in a single direction, it halts and starts consolidating to facilitate the below noted parties, before it makes next round of movement in the same direction.
- The parties who are in the right direction and want to cover their positions with profit
- The parties who are in the wrong direction and want to cover their loss.
- The parties who want to add to their profitable positions.
- The parties who have missed the initial move and now want to open fresh positions.
When so many parties get involved in exchange of hands at a key price level, it naturally leads to a huge consolidation represented by Inside Days. More than quite often, you will notice an Inside day after a strong initial rally or decline in the price. This type of Inside day will fall under this category.
Illustration 5: After initial rally, price starts consolidating and forms an Inside bar. Again the price makes second round of rally and forms an Inside bar indicating accumulation before next leg of up move.
D. Ranging markets
When the big time players take no interest in the market, the liquidity dries up and the price stops making any substantial moves leaving the market in a small range. We call this as a “period of indecision” as both the buyers and the sellers with large orders refuses to particitipate in the marketplace. Whenever the institutional traders stay away from market activity, price has nowhere to go but to trade in a narrow range. This period of indecision may last for long depending on various factors. As a consequence, price is reflected through multiple Inside Bars.
Illustration 6. Market goes in to a range and we get multiple Inside Bars within very short span of time. A trader needs to exercise enough caution against such Inside Bars
Finding Reliable Inside Bar
The success, efficiency and the effectiveness of trading the Inside Bars largely depends on spotting the highly reliable Inside Bars. It is important to note that all Inside Bars cannot be traded profitably.
To ensure that we trade only reliable Inside Bars, following guidelines are of utmost importance.
a. Time frame :
Rule: Trade Inside Bars only on a daily Time frame
Trading the daily time frame has its own distinctions as noted below.
- Reliable
- Affordable risk
- Optimal frequency of formation of Inside bars
- Helps to avoid overtrading
- Needs less trade monitoring and screen time.
b. Trend:
Rule: Trade Inside bars only in the direction of the trend
We are aware that big money is always with the trend. Hence as a thumb rule, we avoid trading Inside Bars against an ongoing trend. To mitigate the risk to the possible extent as well as to magnify our gains, we always trade in the direction of the trend. For example if the major daily trend is long, we trade Inside Bars only on the long side and avoid opening shorts. It is a proven fact that most of the large drawdown in trading accounts are due to counter trend trades. It is pertinent to note that all profitable traders are always in sync with the thought process of big players in the market. Trend always signifies the opted direction of institutional traders.
Period:
Rule: Always ignore the Inside Bars formed during low liquidity period
Inside bar formed during a low liquidity period must be ignored. Examples are Christmas holidays, all US Bank holidays and other holidays when big ticket players remain absent from the market. During these periods, due to non presence of big time players, the range shrinks and the chart will start printing Inside Bars. Since these Inside Bars are formed as a result of low liquidity and not due to a process of accumulation and distribution i.e.: exchange of hands between big time players, one should abstain from trading such Inside Bars.
Trading the Inside Bars
Before trading any strategy, we need to answer the following questions.
1.Where do we get in to the trade?
2. Where do we get out of the trade in case it does not workout? And
3. What is the risk associated with the entry in comparison to the potential return?
a. Entry: We make entry on the breakout of an Inside bar, in the direction of trend baring cases of reversals. Just to understand, In case the overall trend is up, we go long with the breakout on the upper side.
In this context, it is very important to note that we make the entry with the momentum as most of the breakouts without momentum end up with false breakouts. Momentum here refers to a strong/sharp and steep move in the direction of the breakout. For ascertaining the momentum, one can scale down to next lower timeframes like 4 hour, 2 hour or 1 hour charts respectively.
b. Stop: We place the stops in a sensible way so as to make it neither too big nor too small. Under this strategy we always place the stops on either side of the Inside Bar depending on which side of the market we are trading. I.e.: When we go long, we place the stops just below the bottom of the Inside Bar and vice Versa for short entries. The biggest distinction of the Inside Bar Breakout strategy remains the “Stop”. Since this strategy offers smallest logical/sensible stops one could imagine, it is not exaggerating if we say it is one of the simplest yet greatest strategies found in the market.
c. Risk-Reward: Barring other ancillary objectives, every trader’s basic objective remains reducing the risk and increasing the gains to the maximum possible extent. Inside Bar Breakout Strategy offers very low risk (Almost nil!) entries and extraordinary returns on trades. A Risk is to Return of 1:5 and 1:10 are quite common under this strategy. Just to give you an idea, because of the incredible risk reward ratio this strategy has to offer, one can wipe out 10 consecutive losses in a single trade. That says all about the power of trading this strategy.
Illustration 7: After initial rally in the price an Inside Day is formed. When the price breaks high of the Inside day the long entry is taken placing the stop just below the low of the Inside Day.
Illustration 7A: A reward of 2000 pips for a risk of 70 pips comes to Risk reward ratio of almost 1:30!
Multiple Inside Bars
As we know, at a place of key resistance and support areas, big time players start an activity of accumulation or distribution respectively. From a daily chart perspective, Some times this activity lasts for multiple days and the price keeps on making lower range every following day. This phenomenon is popularly called as “Multiple Inside Days”.
As we are aware, longer the consolidation, longer will be the movement after the breakout. Hence Multiple Inside Days offer a great trading opportunity as the breakout from the range leads to heavy movement in the price after the breakout in a particular direction.
Sometimes trading Multiple Inside Days can be tricky as the probabilities are more in this scenario compared to a single Inside Bar breakout. If we understand the underlying psychology under the formation and breakout of Multiple Inside Days, we can trade the same with high degree of success. The most authentic and reliable way of trading Multiple Inside Bars is to trade the breakout of the initial Inside Bar (The first Inside Day in the series). Of course with momentum! As far as stops are concerned, we place it on the opposite side, either just below or above the first Inside day, depending on the direction of the trade.
Illustration 8: In an ongoing downtrend, price consolidates for more than a week and then forms 3 consecutive inside days. Bar No 1, 2 and 3 respectively are consecutive Inside days. As per our rule, we always trade with the trend and a short order is placed just below the low of the first Inside day being bar no.1 in this case. It is pertinent to note that the breakout downside takes place with momentum.
Breakout Traps
Understanding the breakout traps becomes highly essential to trade this strategy effectively. A breakout trap essentially means, the price breaks out in one direction and lot of traders jump in to the trade in the direction of the breakout. Then the price comes back and breaks out in the other direction with momentum and continues its move in the same direction. In this case all the traders who entered their positions on the first breakout are trapped in the bad trade. To overcome such kind of traps we follow certain rules and they are.
- We do not trade against the trend.
- We avoid trading longs in a strong resistance area and shorts in a strong resistance area.
- We avoid trading the breakouts against the trend as such breakouts are prone to trap. Alternatively we wait for the retest of the breakout of key areas to ensure that we are not stuck in the bad trade.
Illustration 9: The chart depicts a key support area.
Illustration 9A: The chart shows a process of breakout trap.
So as you can see the Inside bar breakout strategy can be very powerful when used in the correct context. Inside bars form all the time, but by following some simple rules we can really start to filter out those high risk trades and avoid being caught in breakout traps.
I live and breathe price action every day, and the Inside bar breakout is just scratching the surface when it comes to indicator free trading. This is just one of the price action trading techniques I use in the markets.
I hope this article has been an eye opening on how simple price action based strategies like the Inside bar can actually be molded into powerful trading systems. It’s all about waiting for the better setup and not trying to trade every single inside bar that forms and with such high risk/reward potential of these breakouts, you can afford to lose a few trades and remain ahead in the long run.
The pin bar trade setup is the most effective price action trade setup there is. It is an extremely powerful setup when used correctly. Many trader only trade off of a pin bar formation and they are very successful traders. In this lesson you will learn what a pin bar is, the characteristics of one, how to trade it and the difference between a great pin bar and an average one.
What is a Pin Bar?
A pin bar is short for Pinocchio bar, the reason it is called a Pinocchio bar is because it is telling us that the market is lying. What that means is that the market price went to a certain level then came all the way back to near the opening price. It lied as to where the price was going.
A pin bar is made up of a small body and a long wick extending from the body. Pin bars are very noticeable and stick out on charts. This makes it easy to identify on charts.
Pin bars form because the market rejects the prices that it goes to and pushes the prices back to the opening price of that candle. This shows that the market is running out of steam and is ready for a reversal. That is where we get the signal to enter the trade and ride the reversal for profit.
Characteristics of a Pin Bar
A pin bar is very easy to notice on a price action chart but not all of the ones that look like pin bars actually qualify as a pin bar. There are a couple of key characteristics that a pin bar must have to a true pin bar.
Pin Bar Characteristics
- Wick must be 3 times as big as the body
- Wick must be larger than the previous bars and stick out from the rest
- Body must be on one end of the wick, not in the middle
- Price has to close within the previous candles high or low
- The Smaller the body the better, the bigger the wick the better
In the chart below you can see a great example of a pin bar. The wick is 3 times as big as the body, it sticks out from recent candles and it closes within the previous candles low. The body is small and it closes on the end of the wick. Overall this is a very good-looking pin bar.
Now some pin bars are going to be better than others, this all depends on its characteristics. For example if the body closes closer to the middle than the end of the wick then it isn’t going to be as effective of a pin bar as it would have been if it would have closes at the end of the wick.
So it is important when looking for pin bars that they have all of the characteristics that were named above if you want the most effective and profitable trade you can get.
How To Trade a Pin Bar
Before you even think about making a pin bar trade you need to make sure it fits the characteristics of a pin bar that were stated above. That is the first thing you should do when you think you see a pin bar has formed. Once a pin bar has been confirmed you can begin to look at the other parts the trade needs to be taken.
The next thing that should be looked at before a trade is whether or not the market is trending or is ranging. Knowing this will better help you understand what the market is doing and will help you accurately read the market. A pin bar that has formed with the trend are the most effective trades but you can also look for trend reversals and pin bars in a ranging market. Trading against the trend and in a ranging market is going to trickier but can also pay off big time.
This chart is a downtrend and a pin bar forms rejecting higher prices and this indicates it is ready to continue its trend downward.
On this chart below we can see that a pin bar formed after a major downtrend. The market then reversed and shot up. This is the power of a pin bar.
With the chart below the light blue rectangle represents the trading range. Trading when the market is ranging is very risky but can also be very profitable. As you can see just on this chart there was one pin bar that didn’t work out and one that did. The one that did it formed at the bottom of the range and the price went all the way to the top of the trading range.
Support and resistance zones are also key when trading pin bars. The reason for that is because at these zone is where we look for pin bars to form. These zones are excellent areas for the price to reverse because in the past the prices have respected that zone.
Wait for price to get near a support and resistance zone then look for a pin bar formation. By trading with support and resistance you are greatly enhancing your chances for a successful trade because you are reading what the market is giving you.
When prices move up to a resistance zone you will be looking for a bearish pin bar. This is your signal to enter the trade short.
With the chart below you can see that price moved up to the resistance zone and formed a pin bar. The wick went through the resistance zone which shows that the market rejected the higher prices. Then the market reversed into a downtrend.
When prices move down to a support zone you will be looking for a bullish pin bar formation for you to go long.
In the chart below you can see that a pin bar formed with a huge wick which penetrated the support zone. This is very good sign and shows that the market has run out of steam and is ready to reverse trends just as this one did.
The best time to enter a pin bar trade is when you have the trend in your favor and it has formed right on a support or resistance zone. This is called trading with confluence.
Trading with confluence is the most important thing when it comes to having highly successful trades. It means that you have at least two things in your favor. We can use in trading because we can often have more than two reasons to enter a trade. Those reasons could be with trend, at support or resistance zone or a trade setup.
When you are able to get all three of those things in your favor you can expect a much higher win percentage on your trades.
This is a great example of a trade that has everything working for it. A bullish pin bar has formed at a support and resistance zone and the market is in a uptrend. All three are working in your favor which makes for a very high probability trade setup.
Entry and Stop Loss Placement
The entry point and the stop-loss placement are very important to figure out before you make any trade. This way you know your risk that you are taking and know where your trade will be entered.
The entry point is very simple to find for a pin bar setup because you place it right below the low of a bearish pin bar and right above a bullish one. The best way to do this is setup a sell or buy stop order. What that means is that once the price gets to a certain level your trade will be triggered and you will be in the trade. This provides the most accuracy when trading.
Simple diagram of where to place your sell and buy stop orders for a pin bar trade.
The stop-loss is also very simple to find for a pin bar trade. You place the stop-loss right above or below the wick of the candle. Placing the stop-loss here will give the trade space to work itself out and hopefully move in the direction you had hoped.
Another really easy to follow diagram of where to place your stop losses when trading a pin bar.
Conclusion
In conclusion the pin bar is a very valuable tool when it comes to trading price action and Forex in general. It is a trade setup that has proven over and over again to be a reliable signal to trade. If you take your time and learn the ins and outs of a pin bar it is really the only trade setup you need to be a successful and profitable trader. Remember that not all pin bar setups are created equally and some will be more likely to workout then others. By trading with confluence such as support and resistance zones and with the trend you will greatly increase your chances of a successful trade. Now go test this signal out on a demo account until you are comfortable enough with it to trade live.
I hope that you have learned a lot in this lesson and especially about the pin bar trade setup. If you have any questions you can leave a comment below. Also remember to sign up for our newsletter below where you will receive free ebooks, get trade setups sent to you, free tips and guides. Plus you will receive information that wont be on the website.
