Why You Cannot Trade Every Inside Bar
In one of our previous articles, we wrote about the inside bar and how it is an important price action formation that can offer great trading opportunities. However it is important to note not all inside bars are created equal.
An inside bar is a bar where the entire price action (including the wicks) are totally inside the previous bar. Now on lower time frames these are more common and not too important (say on anything less than 1hr chart) but on the 1hr time compressions and above, they have a lot more significance. In total, Inside bars form approximately 10% of the time (or are approximately 10% of all candles) and are a unique price action formation. When they occur at critical support / resistance levels (prior highs/lows, Fibonacci retracement levels, outer pivots, larger Kumo formations, etc) they have more impact and can often lead to strong price moves.
There are several key reasons why an inside bar would form which a few are listed below:
- Price is consolidating after a large up/down move in price and is about to start another leg in the same direction
- Price is coming up against a critical support/resistance level which shows some hesitation in the market as to whether it will continue or not
- Price Action and liquidity is dropping before a critical news announcement so with nobody taking new positions, price will not have enough order flow to move consistently in one direction
- Profits are being taken
Since news events naturally drain liquidity before the event, they become less important in forming inside bars. The key things to note is that an inside bar generally forms from a) the consolidation of a large move before starting another leg or b) price is coming up against a critical support/resistance level which shows hesitation in the market.
This pause in the price action gives us a great chance to get into trending moves as we can use the inside bar to get into the trend before the next leg starts.
However, you still cannot treat them as equal. As traders we have to note whether the inside bars are occurring with trend or counter-trend? If they are occurring counter-trend, then they become much more difficult to trade.
Case in point, take a look at the chart below on the GBPUSD 4hr chart. The trend is clearly to the upside with virtually no red bars and a 300pip climb. Then we have a red bar in the middle of the chart followed by a blue inside bar. This inside blue bar was followed by another 250pip leg up.
Even though the pause happened at the 1.5100 barrier and after a decent wick rejection to the upside, the bottom line is the inside bar formed after a down candle. The translation of this is price hit a resistance, traders took some profits, started to evaluate the move and while doing so, price sold off a little. An inside bar formed after price sold off a little so this inside bar does not tell us much other than price volatility is contracting. These are the least informative of the inside bar setups.
Thus, you cannot trade every inside bar the same as they signify many different price action situations.
With that being said, there are ways to trade them efficiently. We have actually analyzed inside bars on every pair from the 1hr to weekly time frames. From this data, we were able to extract the % chance it would;
-break with trend
-what the average pip break with trend was
-what the average pip break counter-trend was
-and several other metrics
If you want to get access to this and other proprietary quantitative data on the inside bar or several other price action setups we have tested, then check out our Price Action and Pivot Point course where you get access to this data along with permanent access to our live forum and a follow up private one-on-one session.