The Inside Bar Strategy
Hello traders! Welcome to the Price Action Course and the sixth module, ‘Price Action Strategies.’ In this lesson, I’m going to teach you how to trade the inside candle strategy. The inside candle strategy is a continuation pattern that you’re going to find on very strong trends and sometimes on very strong moves you’re not going to be able to… well price is not going to make a correction deep enough for you to be able to get in on a very good risk-to-reward ratio scenario. But with this inside candle strategy, I’m going to teach you how to get in on this strong moves to the upside or the downside that doesn’t require too deep of a correction.
So let’s start by defining what the inside bar is. An inside candle is a formation, it’s a continuation pattern in which the second candle is completely contained within the range of the preceding bar called the mother bar. It really doesn’t matter if we have one bull and one bear candle and it really doesn’t matter if let’s say the closing of one bar is below the opening of the next one or if the opening of one bar is above the closing of the next one. What matters is that the second candle is contained completely inside the range of the first candle which is called the mother bar. The high of the mother bar has to be higher than the high of the second bar and the low of the mother bar has to be lower than the low of the second bar. And here’s and example, you can see that the first candle is a very strong bearish candle and the second candle is contained within the range of the mother bar. Here we have the high of the mother bar and here we have the low of the mother bar.
And you can see that the high of the second candle is well inside the range as well as the low of the candle. So we have here a inside candle or inside bar formation. And if we were on a down move, we will be looking to go short after the second candle closes and we have printed the inside bar formation. Now for the actual trade it’s quite simple actually and the risk that you are going to put on depends on length of the mother bar. But let’s start by how do we trade it. The way to trade it is to enter the breakout of the mother bar range. This means that in an uptrend we are going to go long when we break with the high of the mother bar and in a downtrend we are going to go short when we break with the low of the mother bar. And this means let’s say that we were here in a down move and we have this huge candle printing and then we print an inside bar, then this third bar closes below the low of the mother bar right there, we are going to go short for a continuation of the down move and the stops of course are always going to be in a down move at the high of the mother bar and in an up move and the low of the mother bar.
This means that if we were in an actual down move, we go short at the break of the mother bar low and our stops go above the high of the mother bar. And this is because if we break below but then price retraces and breaks with the mother bar high, our trade idea is invalidated and we must get out of the trade on a loss immediately. But this inside bar continuation pattern is not that frequent but it works very well and it has a very high win ratio. And of course it works better or the higher time frames like the four-hour chart or the daily chart because a daily inside candle is called an inside day, which is a very strong pattern for continuation of the overall structure of the market. Now we are going to go to a chart right now… I think we’re going to go to ES, which is the E-mini contract of the S&P 500 and we’re going to go through a couple of inside bar formations.
Okay traders, we’re back and as you can see we have the E-mini futures contract of the S&P 500. And we’re going to analyze the price action after these turn around or this roll over in the market. You can see that… let me just thicken this out for you so you can… because we are going to be just looking at single bars, we need our bars very thick. Okay, like this. So you can see that right here we break with the down structure and this is simple price action analysis just because… you don’t know what’s going to happen but here we break with the down structure so we are looking for opportunities to go long. Price breaks with the down structure and right here we have the first inside candle. You can see that, right here we have the high of the mother candle and right here we have the low of the mother candle.
Okay and this candle right here is inside of this range, which means that we have right here an inside candle and we must go long after the break of the mother bar’s high. This bar breaks with this range. Our stops go way below and because we are trading with a very specific price action strategy, we are always going to put our stops below the mother bar’s low. And in this case, we are going to be risking about $27 per contract on a long position. Now remember that we are just looking for inside candles. This means that I’m just showing you how to enter the market with an inside candle formation. Now it’s up to you to utilize everything you have learned on this price action course to make these trades work. Now, price starts to go up and as you can see we continue to go up. And right here… I don’t know if we have an inside candle, we don’t have an inside candle yet until we hit this high right here.
So we continue to the upside and of course you know that if you were long from the first setup on the E-mini S&P 500. At this inside bar, you should move your stops to the same levels of the stops of the second setup and lock in these 11 points. Now, price continues to the upside and we cannot find… well, the market doesn’t print another inside bar until we hit this small correction to the downside and you can see that the high of this candle is right here. Let me just make this line a little bigger. And the low of the candle is right here. And as you can see we have a… well, this very small bearish dodgy is the inside candle that we were looking for so we have our setup. Right now, we are just waiting for our break above the mother bar’s high for us to be able to go long on this setup. And this is a very clear example of why we always wait for the candles to close. You can see that this candle breaks with the mother candle’s high but fails to close above and closes below.
And this means that the market could actually be rejecting these areas and it’s going to roll over to the downside but right here you can see the price actually closes above and we put our stops right here. And if we’re long from these two positions, we’re going to move our stops to the same level of these stops which means that we are locking in already 55 points from the first setup and 23 points from the second setup, which means that overall we have made almost 80 points just by trading inside bars. And right now we are going to reach 24 points on this setup and as you can see price moves all the way up here. Well, you are price action traders. When you see the prices start to trade in a very narrow and very choppy range, you can close your positions for an overall profit of 139 points from the first position plus the 2nd and 3rd position. So this is how you trade the inside bar strategy and as you can see, this is a very good strategy when we don’t get deep enough corrections — in this case — to a downside because we are in an uptrend and whenever we spot an inside bar, we just wait for the break of the mother bar’s range.