The Inside Bar Trading Strategy – Market Consolidation Periods
The inside bar opens up a whole new aspect to traders within the stock market. The inside bar pattern is a two-candle formation. Inside bars smaller in size and trades within the prior bar’s high-low range. You may see traders mention “inside day” or “inside week.” The inside bar pattern is what these traders are referring to. This means an inside bar is printed on the daily, weekly, or 15-minute chart.
The bar prior to the inside is typically referred to as a “mother bar.” You may also see the inside bar labeled as the “IB.” While the mother bar is labeled “MB.” An example of each is shown below:
The inside bar signals a period of consolidation within a market. This equilibrium or consolidation is taking place on a lower time frame. For example, an inside day found on the daily chart is likely a consolidation pattern found on the 30 or 60-minute charts. Below is an example of this using MS daily and 30-minute charts.
The inside bar often forms following a stronger move in the market. Price takes a break and consolidates before making another move. However, inside bars can form at major turning points for the market and play as reversal signals. So it is always best practice to wait for confirmation before establishing a trade position.
Trading the Inside Bar
There are many traditional strategies when trading inside bars. Some may include setting a buy stop just above the mother bar. This way, when price breaks above that level, your order is automatically placed. The traditional stop loss level is at the mother bar’s midpoint, which makes much more sense than the traditional entry of placing a buy stop to enter on the break above. Though this method of entry/exit may be effective, it is not an efficient strategy.
As each inside bar setup is different, the lower time frame setup will not be the same each time. Several examples are below to demonstrate this. Keep in mind that in a hypothetical break out, your stop loss should be much closer to your point of entry than displayed below. The first red flag of a reversal would be taking out the buy stop level (to the downside, once your order is placed). So on the contrary, it would seem that the ideal buy level is a break and close above the inside candle, with a stop loss set just below that same level.
In a symmetrical triangle formation, with the mother bar’s midpoint essentially representing the apex (or contraction climax of price action on lower time frames), this level of stop-loss placement would be a valid method to protect the trader from a symmetrical triangle breakout reversal. It is not uncommon for price to come back and retest this apex before moving higher on breakouts. A full breakdown of the apex would signal a reversal and false breakout. An example below on the SPY 60-minute chart.
When it comes to the entry, setting such a buy stop order sets you up for potential risk of an inside breakout reversal, also referred to as a “rev-up” or “reversal.”
The Rev Setups
Reversal bars are a very effective strategy when applied correctly. A “rev-up” or “rev-down” (based on the direction of the move) is essentially an inside candle breakout failure or reversal. When the consolidation that formed the inside bar breaks, the close of that break candle is much more important than the break itself.
For example, if price breaks above the inside range and holds to close the candle in that new range, it’s a bullish setup. Price is likely to continue to the upside. However, if price breaks above the inside range and is sold, it could fail. If it fails, it could close back within the inside bar.
That’s a reversal and a failed breakout of that inside bar. In this case, the reversal or “rev-up” would be a bullish setup. Rev-ups trap bearish traders in a failed breakdown move as shown below:
Broken down on lower time frame:
Going back to a previous post, Consolidation discussed energy builds in coil patterns that create an energy release once price breaks out. In a case involving a reversal, that energy is misread by many. In the case of BA, shown above, lower time frames showed a failed bull flag, while at the same time displaying an inside & down on the daily (but it hadn’t closed yet).
Without realizing it, shorts only added to the energy build. Once they realize the breakdown is recovering, they cover shorts or buy back the stock. This creates more buying and releases the energy back to the upside. In certain cases, this energy reversal can be faster and more violent than a standard breakout would have been.
Some of my favorite setups include those that involve an inside bar. It’s fascinating that patterns can exist within patterns. Remember to analyze multiple time frames. While an inside 60 may look enticing, analyzing price on higher time frames may reveal the bigger picture for you.
Keep in mind that higher time frame inside bars are obviously more significant than lower time frames. For example, an inside & up on the weekly chart holds far more weight than an inside & up on the 30 or 60-minute. If two inside (confirmed & closed) breakouts coincide on two different time frames (inside & down day + inside & up week), the higher time frame will typically prevail. Look at the product from every angle before you buy it.
Inside bars are often a powerful consolidation pattern on a lower time frame. They can lead to substantial moves on higher time frames. Knowing what to look for can help find great opportunities and warnings at key levels.
A big tip for all of the TradingView users out there regarding inside bars: there is an inside bar indicator that you can add to your charts that is within the TradingView library. This indicator will label each inside bar for you with an icon of your choice above it. This is a huge help to those who trade using this strategy regularly.
When you get to the page, scroll down and hit “add to favorite scripts.” Then open a chart, and click indicators. Save in your favorites, and you can add it to any chart. Awesome tool. I use this one every day. An example is below. Here’s the link: IB Bars
I hope you found this information to be helpful. If so, please take the time to share it with others.