When analyzing chart patterns to identify potential volatility with an asset’s price, an inside bar indicator is one of the stronger signals traders can spot. Inside bars on a candlestick chart represent consolidation of price action where the bulls and bears are both struggling to move the price higher or lower from its current position.
When looking at a candlestick chart, you can spot an inside bar indicator when a given bar’s high and low are fully contained by the bar directly preceding it. This signals a narrowing of price action that can be used to predict upcoming movement outside of this range.
One way to think of an inside bar is to compare it to a volcano, where pressure is building underneath before an eruption. For traders, an inside bar can signal a price breakout coming in the near future, which creates a profit opportunity, whether you’re buying or shorting the asset.
Identify Breakout Potential as It Develops
When an inside bar develops, it signals consolidation that could preview a breakout coming in the near future. But to capitalize on this breakout potential, you need to identify whether the breakout is likely to result in price appreciation or depreciation.
To do this, you’ll want to consider other technical indicators and chart patterns you regularly use in your trade analysis. Although some traders are strong advocates of inside bars as a reliable indicator, most traders likely want to use other chart patterns and technical indicators to evaluate potential price movements. Using these other indicators can lend more credibility to the indications coming from the inside bar.
Keep in mind that, while inside bars can represent the calm before the storm, you’ll be able to turn a profit only if you can reliably evaluate these trades to determine what kind of position you should open.
Tread Lightly When Trading Inside Bars Under the Daily Chart
Inside bars are most valuable when you’re looking at daily charts, because they offer a larger sample size of price action on a given asset. On charts with a smaller time frame, such as one-hour or four-hour charts, inside bars are fairly common and not always a reflection of consolidation taking place.
If you can back up short-term inside bars with strong chart patterns or other technical indicators suggesting near-term movement, it might be worth opening a position. But be aware that when you’re evaluating data from narrower time frames, the validity of your inside bar evidence isn’t as strong as what you could expect from a daily chart.
Track Consolidation from One Day to the Next
The best use of inside bars, as a technical indicator, is on daily charts. An inside bar illustrates that consolidation has taken place over the course of an entire trading day, which signals that the shrinking range is due to expand and become more volatile.
To help identify the direction in which the price might break out, always consult the day bar trend, as well as Fibonacci retracement and other applicable chart patterns and technical indicators.
Traders should open a position when the price is still within the range established by the inside bar, or when the price breaks just above the upper level of the inside bar. By the time you wait for the price action to move swiftly in one direction, you’ve already sacrificed a huge chunk of your would-be profits.
Remember that on daily charts, it can still take several days for consolidation to yield a breakout. An inside bar might forecast price volatility, but it doesn’t promise to deliver that movement on a fixed schedule.
Always Place a Stop-Loss Order
Inside bars are a valuable indicator of a breakout, but traders can never guarantee that the price will break the way they’ve predicted. A stop-loss order should always be placed on any trade that relies on an inside bar to identify price consolidation.
When buying, place the stop-loss order just below the lower limit of the inside bar. Because an inside bar essentially represents a tug-of-war between the bears and bulls, traders need to expect that bears will win a few of those battles. Setting stop-loss orders will help you minimize those losses, preserving your profit from the instances when your prediction comes true.
Inside bars are a great tool for identifying potential price breakouts on forex and other assets. Some online trading platforms even offer indicator tools to help identify inside bars on a chart, making it easy to discover and take advantage of strong trade opportunities.
Because an inside bar is an easy indicator to identify, it’s a strong data point for both amateurs and seasoned traders to consider. Just make sure to use the inside bar as a starting point for further evaluation of potential trading positions.
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