The Inside Bar Formation:
The Inside Bar formation consists of two candles, the second bar is completely contained within the range of the first bar (also known as the mother bar). The formation is a high-probability price action trading strategy that provides traders with a good risk reward ratio since they typically require smaller stop losses than many other setups.
An Inside bar formation indicates a time of indecision or consolidation. Inside bars typically occur as a market consolidates after making a large directional move, they can also occur at turning points in a market and at key decision points like major support and resistance levels.
The most effective way to trade the Inside Bar setup is to establish the high and low of the first mother candle. The market is likely to break the high or low and continue in the same direction so the most effective way to trade this price action pattern is to set a buy stop order 5 PIPs above the mother candles shadow / wick high and a sell stop 5 PIPs below the mother candles shadow / wick low.
The stop loss should be placed at the opposite end of the mother candle. 15 PIPs above. When the price eventually breaks out, you will be in the trade. You can then cancel the other stop order to prevent it being absorbed if the market reverses. Set your target levels in line with previous support/ resistance levels.
The first step when recognising an inside bar formation is to draw a highlighted box range from the top and bottom wick of the first candle (Mother Bar) as accurately as possible. These formations are brilliant to trade at key levels of support/resistance in order to catch the reversal. Once you have highlighted the formation with the rectangle tool you then step down to the lower timeframe and follow the execution rules. The best inside bar formations are found on the Daily timeframe:
Weekly>Daily | Daily > H4 | H4 > H2
The example below is a daily timeframe inside bar, so we now step down to the H4 chart.
Below is the H4 execution chart, stepped down from the Daily inside bar formation. As displayed, we now have a refined viewpoint of the currency pairs price action. The first step is to await the moving average crossover in the direction of the reversal/trend direction. Step 2 is to await a clean breakout & candle close above the box range (in the case of this particular example). You then execute the trade position with the target at the next key level with the stop loss placed 15 PIPS below the opposite end of the rectangle box.