5 Things To Know When Swing Trading Inside Bars In The Forex Market
Swing trading inside bars is a simple trading pattern where one or many bars are contained between the high and low of another known as the “mother bar”. Often times, depending on the length of the inside bar pattern, it will appear as a triangle on your chart.
This is a breakout trading strategy that you can use when price has found itself near levels of support and resistance.
Using Inside Bar Candlestick Pattern At Good Areas
Since the inside bar indicates a lower level of volatility, it can appear just about any place on a chart and that is why you must have some trading rules about using the pattern.
A few rules you may want to use for a higher probability trade and to avoid over trading are:
- How many inside bars do you need to see inside the mother bar?
- Does the mother bar include the low and highs or will you use the real body of the candlestick?
- Will inside bar trading only take place at obvious levels on the chart?
- What technique will you use to pull the trigger on the trade?
- What system will you use in placing your protective stop loss?
Every proper trading system has rules and this strategy is no different. Without trading rules, you will fall victim to emotional trading and that is one of the fastest ways to dwindle your trading account to zero.
Developing Your Own Inside Candle Trading Strategy
Let’s take the 5 points above and expand on them as you develop your trading strategy. I want to focus on swing trading inside bars in Forex because even though FX is a 24 hour market, not all of those hours are worth sitting at your desk for.
1. How many inside bars do you need to see?
Since the formation of this pattern indicates lower volatility (volatility compression) and indecision, the longer it plays out the more pent up energy is contained within the pattern. You could have multiple occurrences of them which will form a triangle or you may only have one. For trading patterns, the more the merrier for me and some traders need to see weeks of consolidation before taking a trade.
2. Mother bar body or shadows?
For simplicity, you could simply use the entire candlestick but there are arguments for both. Remember that each close on a candle is an acceptance and willingness of market participants to hold their position at that price. Where the close occurs with the mother candle may have you decide which part to use.
3. Obvious levels on the chart?
You may elect to only consider swing trading inside bars when they present themselves at obvious turning points on the chart. What about seeing a large momentum move and then a series of inside bars forming at the highs? Depending on where these occur, this strategy may be showing a trend reversal or continuation. You have to know how to read price action to have your order leaning one way or the other.
4. How will you enter the swing trade?
Some traders will wait for the break of the mother bar and others will look for a price pattern on a lower time frame to indicate an entry. Just keep in mind that at every breakout point, there can be a lot of volatility which could also include slippage. One technique is to look on a lower time frame to see if there is an indication like a pin bar showing up in a range inside of the inside bar pattern. You may find an entry in that zone.
5. Stop loss when trading inside bars
You could elect to use the low of the mother candle but keep in mind that you may be the victim of a bull or bear trap if you use a tight stop. You may study using the ATR as a stop measure or, depending on the strength of the break, you may use a point inside of the pattern.
Swing Trading Inside Bars Conclusion
Swing trading inside bars is a great non-day trading strategy since, once the mother candle has formed and the amount of inside bars have formed that your trading plan requires has formed, you can set a stop order to be taken into the market. If using that method, you may want to use the ATR value x 2 at the mother candle. This way you will have a better representation of the range prior to the inside bars.
“By mid-1978, I had been a security analyst for eight years and it had become intolerable. I knew I had to do something different. I always knew I wanted to work for myself, have no clients, and answer to no one. That, to me, was the ultimate goal.” – Marty Schwartz This is what it’s all about freedom. Freedom to eventually do whatever you want to do with the market being your only boss as you try to take money from it. This vision of freedom is what drives me to take the risk and do the work to get to the finish line. I don’t strive to be a billionaire with multiple houses, I am only looking for freedom. I have enough money to do whatever I want I now want enough money to do nothing. Most of the traders interviewed by Jack Schwager and Michael Covel were not flashy they simply traded for a living whether managing money for others or their own money. Marty Schwartz is a Market Wizard. In his prime he had streaks of 20% return months. (Yes, 20% return months). He did what is impossible for most. He traded a lot of futures in his time and in recent years he has shifted to selling option premium which was surprising to me. He always found ways to come back from losses and make money consistently. Schwartz explains how his Marine training helped his trading. There is no point in just taking punishment and that retreating can also be a form of offense. He explains “The most important thing is to keep enough powder to make your comeback.” Never bet all your chips and never lose all your chips. Marty Schwartz’s 6 Key Trading Rules: “I try not to go against the moving averages; it is self-destructive.” Stay in the same direction of the moving average trend in your own timeframe. “Before putting on a position always ask, ‘Do I really want to have this position?” Are you taking a signal or just acting on an opinion? “After a successful period, take a day off as a reward.” You have to stop and enjoy the fruits of your labor to prevent burn out and stay motivated. “My biggest losses have always followed my largest profits.” Winning streaks can be dangerous because they lure a trader into feeling like they know something and then trade too big. “Bottom fishing is one of the most expensive forms of gambling.” There is a big difference between buying a dip and catching a falling knife. “Before taking a position, always know the amount you are willing to lose.” Know what your maximum loss potential is before you ever take a trade.
Another great price action pattern, that often leads to very favorable risk to reward scenarios, is the bullish harami candlestick pattern. In this addition to my price action course, I’m going to show you how to correctly identify and trade the bullish harami pattern. This pattern is only a moderately strong signal – not in the same strength category as something like a hammer or engulfing pattern. I prefer to trade candlestick signals in addition to my main trading system, using my trading system to qualify the candlestick signals that I may be considering. Since the bullish harami is only a moderately strong reversal signal, I don’t recommend pure price action trading with this signal. What is a Bullish Harami Candlestick Pattern? The bullish harami candlestick pattern is, as mentioned earlier, a moderately strong bullish reversal signal. This pattern starts with a relatively large bearish candle followed by a relatively small bullish or bearish candle. The real body of the 2nd candle must be inside of the real body of the 1st, bearish candle, and must not be more than 25% of the 1st, bearish candle. In most markets, the 2nd candlestick in the pattern can be bearish or bullish, as long as its real body is inside of the real body of the 1st candle, and its size is not more than 25% of the 1st candle (see the image above). In the Forex market, however, the 2nd candle in the pattern will almost always open near the close of the 1st candle, and will always be a bullish candle (because another bearish candle would mean no inside bar). I’ve said it over and over again in these articles, but it’s worth repeating: the context in which you trade these candlestick patterns is of crucial importance. A true bullish harami pattern only comes after a downward trend in price. Never trade these signals from consolidating market prices. Trading the Bullish Harami Candlestick Pattern In the image below, you can see a bullish harami candlestick pattern followed by a short rally in price. The second candle in this particular bullish harami pattern forms a hammer signal. The new upward movement is short-lived, but you still could have earned some decent profits on this one, especially if you had used the 50% entry that I like to use on hammer and shooting star signals. If you would have used the 50% entry based on the hammer candlestick in the bullish harami pattern above, you could have made about 3x your risk at full leverage. I personally would have closed half of my position once it reached the 1:1 ratio mark (or 1% for me, since I only risk 1% per trade). This way, even if the trade goes against me and triggers my stop loss after this point, I will still only break even. Example: You enter the trade (pictured above) with 4 lots at the traditional entry (when the new candle breaks the high of the smaller, second candle of the harami pattern). You’re risking 1% of your total trading account. Price starts to move in your favor, and soon you’re up 1%. At this point, you close 2 lots, and leave the other 2 lots in the market. You are now in a bulletproof trade, because even if you never take profits on the remaining 2 lots, and your stop loss is triggered, you still would not lose more than you’ve already made on the trade. In other words, you would break even. This next trade is similar to the last in a couple of ways. The retracement after the bullish harami candlestick pattern was short-lived, and the second candlestick in this pattern is a hammer signal as well. We’ll use this example to go over some possible entries for this useful candlestick pattern. Entry number 1 is the traditional entry for this pattern. Using this entry, you enter the market when the next candlestick after the harami pattern breaks the high of the smaller, second candlestick in the pattern. In the trade above, that would have been when the new candlestick breaks the high of our hammer signal. Entry number 2 is simply an entry at the open of the next candlestick. It is more aggressive because the bullish harami signal’s relevance is not confirmed by price before you enter the market. It is entirely possible that price could immediately head for your stop loss. On trades where this entry works out, you will get a better risk to reward ratio than with entry number 1. Entry number 3 is an entry when the new candlestick comes back to the 50% mark of the hammer candlestick that appears in our harami signal above. It is considered to be aggressive by some traders. I don’t consider it to be aggressive because it gives you a much better risk to reward ratio when it works out. This particular 50% entry (which is 50% of the entire range [high to low] of the candlestick) is only used on pinbars – like the hammer, in this case, or shooting star signals. Note: The only downside to entry number 3 is that the 50% entry will sometimes keep you out of good reversal trades that simply never return to the 50% mark of your hammer or shooting star. The bullish harami candlestick pattern pictured above is an example of this candlestick pattern that worked out very well. This particular harami pattern signaled the end of a retracement to the overall upward trend. I chose to include this example because many price action traders would not have taken this trade, and they would have missed out on some serious profits. The two candles that formed the bullish harami signal look fine, however, this pattern did not come after a very good downward trend in price. I probably would have taken this trade, however, because of the obvious resistance level that started the small downward retracement in price. One of the benefits of trading harami candlestick patterns is that the potential risk to reward ratio is usually pretty good on these trades. In the example above, even using the traditional entry, this trade would have gone for at least 1:1 risk to reward if price returned anywhere near the previous resistance level. Note: Your stop loss should be placed under the lowest low in the series of candles that formed your signal. In the example above, you would have put your stop loss under the low of the second, bullish candlestick in the pattern. Final Thoughts Candlestick patterns are great short term signals, but there is never a guarantee that price will continue in any direction for very long. Bullish harami candlestick patterns typically make for good risk to reward ratios, making them profitable even on short-lived reversals. The context in which these candlestick signals are taken is very important. A true bullish harami candlestick pattern only comes after a downward trend in price. Never trade any candlestick signals during periods of price consolidation. As always, taking advantage of the best entries for each particular trade and using wise money management skills will go a long way toward your continued success with these candlestick signals. The bullish harami candlestick pattern is often overlooked by price action traders because it is only a moderately strong signal. However, the favorable risk to reward scenarios that harami signals present make them worth learning. Be sure to demo trade this pattern until your are consistently profitable, and have fun trading!
The Wolfe Wave chart pattern is created when price action makes 5 waves showing the key supply and demand areas that create a zone of support and resistance as buyers and sellers fight back and forth until a breakout of the expanding range occurs to a projected price extension. Wolfe Wave patterns can be created on any timeframe and they are used for two things: Project the probability of the path of least resistance for the next price swing. Create an entry signal for increasing the odds of being in a position when it moves in one direction. Wolfe wave patterns can be either bullish or bearish depending on the direction of the breakout of resistance or support. These chart patterns create breakout signals and are meant to capture trends in price in the direction of the breakout. Price channels in an uptrend can create a Bearish Wolfe wave and price channels in a downtrend can create a bullish Wolfe Wave and a sideways range happens when price is moving sideways and it can be neutral and break in either direction. The bullish Wolfe Wave is a type of the falling wedge chart pattern. The bearish Wolfe wave is a type of the rising wedge chart pattern. It is where the breakout of the support or resistance happens that determines the sentiment. The Wolf Wave is similar to an Elliott Wave as it attempts to project the magnitude of the move of a wave. For a chart pattern to qualify as a Wolfe Wave pattern it must have the following dynamics in price action: The 3 and 4 waves must remain inside the channel made by the 1 and 2 waves. The 1 and 2 waves are very similar is size to the 3 and 4 waves and are symmetrical. Wave 4 is inside the price channel made by the 1 and 2 waves. There is consistent time between the creation of all the different price waves, Wave 5 is greater than the trendline made by the 1 and 3 waves and is the last key support or resistance area before a reversal in the opposite direction. Entries can be made either projecting a reversal from support or resistance at Wave 5 or entries can be made in the direction of the breakout of the trendline created by waves 2 and 4. There is a better probability of success on the 2/4 breakout than the early entry at the first wave 5 level looking for the reversal. This pattern is not predictive it is simply meant to show a high probability momentum entry signal and to create a good possible swing trade as buyers or sellers push price action to break out of a trading wedge and move to a projected price target.