Inside Bar Forex Trading Strategy: Start to Finish Guide

by Justin Bennett  · 

April 8, 2014

by Justin Bennett  · 

April 8, 2014

by Justin Bennett  · 

April 8, 2014


Man drawing a start to finish guide

The inside bar can be an extremely effective Forex price action strategy.

However, the effectiveness of the inside bar strategy is largely based on the price action surrounding it. In other words, an inside bar alone does not constitute a valid trade setup.

Far from it.

We need additional clues to tell us that the potential reward is worth the associated risk. That isn't always easy because there are multiple factors that play a role.

But that's okay because by the time you finish this lesson you will have a firm grasp of not only how to identify favorable inside bar setups, but how to trade them for a profit.

Let's kick things off with a video I put together for you.

So what kind of factors play a role?

Let’s take a look!

What is an Inside Bar, Anyway?

characteristics of an inside bar As the name implies, an inside bar (or inside candle), is any period on your chart that forms inside of the previous period.

Said differently, the previous candle completely “engulfs” the inside bar. Keep in mind that we’re talking about the entire range of the candle (high to low) so we aren’t concerned with the open or close of either bar.

As shown in the image to the right, the engulfing candle is more appropriately referred to as the “mother bar”.

Note once again that we’re only focused on the mother bar’s high and low, which forms the range of that period.

Time Frame Matters

The first thing we need to know about the price action inside bar strategy is that it works best on the higher time frames.

For those familiar with the way I trade, you know that I do about 90% of my trading on the daily time frame, with the other 10% spent on the 4-hour charts.

The reason the inside bar works best on the daily chart is because you don’t get all the ‘noise’ that you do on the lower time frames. The daily chart acts as a natural filter and therefore produces cleaner price action patterns that can help put the odds in your favor if you know what to look for. 😉

The inside bar also works best on the daily time frame (or anything higher) because it simply doesn’t occur as often, so the worthwhile trade setups become more obvious.

If you look at a one hour chart, you can probably find multiple inside bars in a single day, whereas you might find just one or two inside bars on the daily chart for the same currency pair.

Context is Key

So now that we’re all on the daily time frame looking for inside bars, the third thing you need to know is that it must occur within a strong trend.

An inside bar in consolidation won’t give us clear ‘directional bias’, which we must have to constitute an effective inside bar setup.

Here’s a short video to help explain this point.

http://dailypriceaction.wistia.com/medias/m414gh1qpe?embedType=async&videoFoam=true&videoWidth=640

To illustrate the significance of this requirement, I’ve included two annotated charts below. Notice how the price action inside bar that occurred within a strong trend was very obvious and would have given us a nice gain, while the inside bars that occurred within consolidation  were not as obvious and would’ve been difficult to trade with any degree of confidence.

inside bar in strong uptrend

The chart below shows multiple inside bars in a consolidating market. Notice how it’s very “choppy”, providing no clear directional bias.

multiple inside bars in consolidating market

So let’s recap. We’re looking for inside bars that occur on the daily time frame in a strong trending market. The example above was an uptrend but they are just as effective (if not more) in a strong downtrend.

So what else do we need to look for?

Relative Size Matters

Why does size matter? Well, size itself doesn’t matter so much, but the size of the inside bar relative to the mother bar is critically important. Let me explain… We all know inside bars come in all shapes and sizes, but when it comes to a valid price action inside bar trade setup, the inside bar must be a size that’s conducive to trade relative to the mother bar. That might sound confusing for now, but it will soon make sense, I promise!

In order to properly explain relative size, we need to discuss how to enter an inside bar trade and where to place our stop loss.

How to Enter an Inside Bar Setup

The best place to enter an inside bar is on a break of the mother bar high or low in the direction of the trend. Here’s how I would’ve entered the inside bar trade we looked at earlier.

inside bar buy stop setup

So now we know where to enter the inside bar trade, but to really understand why relative size is important we need to understand where to place our stop loss order.

Inside Bar Stop Loss Placement

We have two options when placing our stop loss order. The first option is to place our stop loss just below the mother bar low. This is considered the safer approach, however the downside is that you won’t get the best risk to reward ratio possible by placing your stop loss below the mother bar.

The second option is to place the stop loss below the inside bar low. I’ve found over the years that this placement not only gives us the best risk to reward, but it’s also a relatively safe place to ‘hide’ your stop loss order.

Let’s take a look at both options.

stop loss placement on inside bar

You may already know where I’m going with this, but before we go any further let’s sum up what we have so far.

  1. We’re looking for inside bars on the daily time frame
  2. The inside bar must occur in a strong trend (directional bias)
  3. We enter the inside bar trade on a break of the mother bar high or low
  4. We place our stop loss just below the inside bar high or low

Still with me? Ok, good! I’m going to finish this lesson by discussing why the relative size of the inside bar matters and what it has to do with the entry and stop loss placement we just discussed. I’ll give you a hint…it has to do with profit targets and risk to reward ratios.

I’m not going to get too deep into risk to reward, aka R ratio or R multiple. Just know that we should always aim for, at minimum, a 1:2 risk to reward. So if our stop loss needs to be 50 pips away, our profit target must give us at least 100 pips. Ahh…now you’re seeing why the size of the inside bar relative to the mother bar is so important. 😉

The EURJPY example above works for us, because there was no immediate resistance above. The stop loss would need to be 100 pips away from our entry, and the trade would have easily given us 200 pips or more.

Let’s look at our last example where the relative size of the price action inside bar would negate the trade setup based on our profit target. On the surface this looks like a valid inside bar trade setup. We have an inside bar on the daily chart in a strong downtrend…everything looks good.

inside bar in a downtrend

Now let’s take a look at the same setup, only this time we will look back a few weeks to see why this setup didn’t work.

inside bar with support

As you can see, previous support and resistance levels play an important role when determining whether an inside bar is worth trading. So, what this means that relative size of the inside bar to the mother bar is important, but support and resistance levels are equally important. They all go hand in hand if you ask me.

I see many traders making the mistake of taking inside bar trades without clearly defining their support and resistance levels. This is just asking for trouble. It’s like not looking in your rear view mirrors before changing lanes on the highway. You need to know what previous price action has done in order to put the odds in your favor. This is true for any type of price action setup, not just inside bars.

I hope this lesson has provided you with some helpful tips that you can implement in your trading plan. I get into much more detail in my Forex trading course on how to trade price action inside bars as well as several other setups I use when trading my own account.

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Your Turn

How do you trade inside bars? If you don’t currently trade them, why not? Post your comments or questions below.


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35  Comments

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  1. hello sir, if i may ask, for the inside bar trading strategy, why do we enter at the break of the mother high or low? why do we not enter position at the break of inside bar or low? Is there any consequences? Thank you for this good article.

    1. You want to enter after a break of the mother bar because that’s the range high/low. Remember that an inside bar is nothing more than consolidation within a trending market. By using the mother bar to time your entry, you’re confirming that the market has broken out from the current range.

  2. Hello Justin,

    May I ask you if your trade for example is bearish, and the mother bar needs to be bearish, does the inside bar also need to bearish?, or can the inside bar be bullish? thank you

  3. Really helpful….i only trade inside bar setups on daily TF and have been struggling with risk and reward…. it makes sense to look at S/R levels now and only get in if worth so. I can then trust the trade more and leave it to run to target, rather than constantly fiddle with it or cut the trade before even 1:1 ratio of risk/ reward. Helpful , thanks

  4. Hello Sir,

    if the trend for example is bearish, and the mother bar is also bearish, does the inside bar needs to bearish for entry to be considered or can the inside bar be bullish? thank you

  5. Should the mother bar and the inside bar be bullish in an uptrend???? Should the mother bar amd the inside bar be bullish in a down trend??

      1. I think, what matters is the trend. If it is an uptrend and it forms a bullish mother bar, it doesn’t matter whether the inside bar is buyer’s bar or seller’s bar. Look at the trend. That’s what i understood from his video

  6. if we are in downtrend and inside price closes with higher price than mother….do we still continue in downtrend?

  7. Hi Justin, thank you for this article. My question is when you have identified an Inside Bar on the Daily chart. You enter it at the break of the mother bar high / low. Are you waiting for a break and close of the mother bar high/ low on a small time frame like 4H to time your entry. Or is everything done on a Daily chart?

  8. This is a really helpful strategy, thanks. Which moving averages do you use in the video for showing the trend direction (blue and red MA) on the Daily timeframe?

  9. I commend your efforts at simplifying issues in forex training.What is the difference between engulfing bar and the inside bar because in both cases you are watching out for the previous candle engulfing the subsequent one. Thanks.

  10. I always use engulfing bar in my trading. It is one of the best price patters there.

    Thanks for this. Nicely explained.

  11. Hi,
    What a wonderful lesson on the inside bar! I notice you insist strongly on trading the Daily timeframe. Well, if I spotted a setup at a key level in a daily chart with sufficient confluence, can I go to a lower time frame (1hr or 4hr ) to check for a candle formation and proceed to enter a trade?

  12. Thanks! I really appreciate you explanation of inside bars trading. I don’t trade it because I know nothing about but now that I know, I will start trading it.

  13. I don’t trade inside bars because am still confuse with it. My confusion is: is the inside bar signal depended on the color of the candle? I was thinking that in an uptrend set-up, the mother candle must be a bullish candle while the inside bar candle must be bearish candle. Again, for a down trend, I was thinking that the inside bar set-up must have the mother candle as a bearish candle while the inside bar candle must be a bullish candle. After reading your material, I just came to understand that the mother candle’s range must completely engulf the baby(inside bar candle) for it to be valid as an inside signal set-up. Please clarify my first concern.

    Thanks for your teachings!
    Sincerely,
    Ishmael, O

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