An inside candle/bar is an important price action pattern. A simple definition of this pattern is when the price action of a single bar or candle is inside the one prior. Thus it is referred to as AB pattern or a two bar pattern, meaning it has an A bar and a B bar.
What It Represents
The pattern is a major signal to the trader that continuation or reversal is about to occur. It represents a time of consolidation or indecision.
They typically occur as the market consolidates after making a big directional move. This means that the inside candle can occur at key decision points and at the turning points in the market such as at resistance/support levels.
It reduces the risk in entering a trade or in a logical exit point. The pattern can be used as continuation signals or as turning point signals.
While they can be used in the two scenarios, those used as the continuation signals are easier and more reliable for a beginning trader to learn. The reversal signals or turning points are best to leave them alone till you’ve some adequate experience as a Forex price action trader.
How to Trade this Price Action Pattern
Many traders look at the pattern as reversal patterns thus hypothesizing that after the price has either trended down or up for an extended time; the pause in the price’s movement precedes a reversal of the trend. In this situation, it is viewed as a short term swing or trade in the counter trend direction.
However, there is another great away to play inside bars – this is rooted from what the candle isn’t telling us.
Most of us when we have a look at the pattern form on the charts, we see a low price and a high price that’s inside of low and the high of the day before. This can be viewed as a trader’s unwillingness to push the price higher or lower for a couple or reasons.
Perhaps a pertinent report is to be released soon or perhaps the market had made a stratospheric leap and the traders are tepid on bidding the price higher or lower.
So, what is the candle not telling us?
The candle is not telling us that many traders are bidding price higher or lower and that the traders are waiting before taking the next big move in the assets. To traders, that means opportunity.
We do have situations in which we all know the volatility has reduced, particularly when the inside Forex bars take place in a pro-longed trending move; we can look to trade breakouts so that when either a high or low is established we look to get in trade.
Traders who are utilizing the strategy above, are looking to trade the breakouts, which many traders in the Forex market look to when they want to take an advantage of the long term and strong trending moves in the market.
Many traders are looking for the volatility to increase, with the previous high or low being broken so that their strategy can initiate its entry.
Many inside patterns can aid the traders set up cumulative positions, for example, accumulating many positions every day based on the trader’s criteria. Once the breakout happens, the profit potential becomes significantly higher.
The clarity of inside day breakout setup and patterns added with a lower underlying risk, provides a popular strategy for FX trading. Before trying a trading method, traders are advised to research carefully before eventually choosing an asset.