One of the most occurring patterns in stock markets is the Inside Bar Pattern. This is prominent as it is hard to decide what will the next move be as this pattern can be a continuation or a reversal pattern (as well). In this article, we’re going to discuss how you can trade this pattern using the Inside Bar Strategy and what other factors contribute in deciding whether a reversal is coming or the trend would continue.
Before moving forward, it is important for you to keep in mind that this pattern occurs very frequently. However, it is very tricky to predict whether a reversal is coming or if the price action is just haunting for a bit before moving further downwards.
Trading an Inside Bar Pattern Based on News Sentiment
Sometimes the news sentiment plays an important role in determing the movement of the price action. The strategy here would be – If the stock is in a downtrend and if a bad news about the stock comes, then chances are the support is going to get broken and a fall can be continued.
Similarly, if the stock has already formed an Inside bar pattern and is hovering around some specific levels, chances are that when a good news like a good result (or any appreciated action taken by the management) is declared, the price action may reverse and reverse.
Trading based on Support and Resistance Levels
Identifying Support and Resistance Levels can also be of great value if you’re looking to trade in this pattern. Generally, if the pattern occurs at a major support level, then there are high chances that a short-term reversal is due. Similar is the case with the Resistance levels. Do checkout out our article on getting started with Technical Analysis if you’d like to know more about Support and Resistance areas.
Next, we have breakouts and breakdowns that can help you in confirming the direction of the price action. For example, if the pattern has already been formed and the next candle breaks the low of the ‘mother candle’ (forming a new lower low) then there is a high chance of the price moving downwards. Similar is the case with a breakout.
Things to know before trading this pattern
Though the risk to reward ratios in trading Inside Bar patterns is pretty high, yet novice traders should not trade this.
Why? Since this pattern can be identified pretty easily, many traders get excited and opt-in to take up a position without waiting for other signals to confirm their strategy. And since this pattern is highly unreliable (reversal or continuation can happen), there is a 50% chance that the traders might book a loss.
Also, if the price action goes into your favour, then remember to set up a strict target and stop loss. Why? This is because historical data suggests that a reversal after this pattern has occurred is very much possible. One way to set up the targets can be identifying the next immediate strong support/resistance level and wait for price action to achieve it.
Lastly, although there are website or articles that have blatantly put in links to books and long articles for you to read, we think that by simply understanding the basics (mentioned above) can set up your fundamentals pretty straight.
You can move to reading books when you thoroghly know the basics and can identify which piece of information is useful and which is not..
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