3 Inside Bar Trading Methods You Must Avoid

To succeed in trading, we definitely need various strategies. The majority of traders rely on candlestick patterns as their strategy. There are various candlestick patterns that may appear on the chart, but one of the most commonly used patterns is the Inside Bar.

Although it is considered one of the easiest strategies to rely on, many traders still misinterpret it. The reason is that many do not fully understand how to trade Inside Bar correctly. So, what are the common mistakes that traders often make?

Understanding Inside Bar

Inside Bar is a pattern formed from two candles, where the first candle is larger than the second candle. The first candle is commonly known as the Mother Bar (parent candle), because it has a large body. Meanwhile, the second candle is known as the Inside Bar (child candle) which has a smaller volume and appears to be "consumed" by the first candle.

In this pattern, the references used are the highest price (High) and the lowest price (Low). The highest value of the second candlestick will always be lower than the highest value of the first candle, while its lowest value will always be higher than the Mother Bar. So when viewed on the chart, the Inside Bar will always be within the body of the Mother Bar. By only referring to the High and Low levels, you certainly do not need to worry too much about the Open or Close prices when breaking through the range of the first candle's body.

Speaking of its function, the Inside Bar pattern is commonly used to indicate trend continuation and reversal (price reversal). The Inside Bar will act as a consolidator, before finally a third candle appears as a clearer trend direction confirmer.

3 Ways to Trade Inside Bar That Should Be Avoided

Although the Inside Bar is the easiest candlestick pattern to use in trading, many traders still misunderstand and misapply it. These mistakes prevent traders from maximizing their trading. So, what are the mistakes that traders often make?

Here, I will outline three ways to trade Inside Bar that traders need to avoid.

1. Using Inside Bar on Low Time Frames

Most traders will use the Price Action method in trading, as Price Action is considered the most accurate and comfortable strategy; especially when using daily charts.

If you are a Price Action trader who tends to pay attention to candle patterns, never use low time frames. Why is that?

The emergence of the Inside Bar pattern can be identified based on the patterns formed on each time frame. However, if using low time frames, the signals that appear tend to contain a lot of noise. This causes the signals indicated by the Inside Bar to be invalid. Indeed, at first, it may seem convincing and valid, but when applied, it turns out there is no profit or if there is, it is very small.

In addition to the risk of false signals, Inside Bar on smaller time frames can trigger overtrading. When many trading signals appear, traders tend to think that these signals are the right opportunities to enter. There is actually no problem, but the expectation of making a large profit when overtrading is unlikely to be realized.

To avoid this risk, traders should use Inside Bar on the Daily time frame. This time frame can provide a complete visualization of market conditions, allowing traders to accurately determine whether the conditions are suitable for entry or not.

Additionally, traders can also observe the ongoing trend movements more broadly. Information about whether the trend is still continuing or reversing can help traders make the right and potential decisions.

2. Not Using Inside Bar for Trend Following

Many traders think that trading in the direction of the trend (trend following) is better for making profits. If traders can manage their emotions and positions well, this trend following strategy will be very beneficial in the long run.

So how about using Inside Bar for trend following?

Actually, it is perfectly fine, especially since Inside Bar tends to indicate reversals or trend continuations. This pattern is also claimed to show potential breakouts and can provide a more favorable Risk Reward Ratio. However, this pattern is not recommended for beginners as it can be exhausting. Additionally, traders also need to do several trial and error on their Support and Resistance levels.

3. Stop Loss Too Close to the Mother Bar

In the trading world, placing a Stop Loss when entering is very important to consider. Setting a Stop Loss at entry emphasizes that the trader is prepared for the risk of loss that will be incurred. This aligns with the principle of traders who dare to take "High Risk" for "High Return."

Although many traders out there choose not to use Stop Loss because they follow predetermined Money Management, it is advisable to still set it for better profits.

However, the problem arises when traders set the Stop Loss level in the wrong position. In relation to the Inside Bar candlestick pattern, traders often set the Stop Loss too close to the Mother Bar. In fact, traders also use the Mother Bar as an entry reference. If left unchecked, this can lead to the potential of being quickly forced out of the market. Of course, traders who experience this do not have the opportunity to trade again.

To avoid this risk, traders can determine the Stop Loss level using the ATR (Average True Range) indicator. When using ATR, ensure that the Stop Loss level used is greater than the ATR indicator. Another alternative that traders can use is to utilize important levels on the chart, both Support Resistance levels and psychological levels. Review the summary in the following infographic.

Conclusion

Trading using the Inside Bar pattern certainly makes it easier for traders to achieve the desired profit. However, in its application, traders must not overlook the importance of using the Daily time frame, trend following strategy, and setting the correct and precise Stop Loss levels. If these three aspects are applied well in the Inside Bar trading method, the chances of making a profit in the forex market will certainly be better.