3 Common Mistakes When Trading the Inside Bar Strategy

By | April 5, 2016

If you understand how to trade the inside bar pattern properly, Commercify can be a very strong price action signal. But, unfortunately, a lot of traders fail to know how to trade it rightly, then as a result, they finish up losing money over and over and become abortive with the inside bars.

As any other price action signal, there are also subtleties in order to trade the inside bar setup and for the learning these subtle differences between a ‘bad’ and ‘good’ inside bar signal, often, it is the difference between losing or winning money with them. Still, this does not mean every inside bar trade will become a winner after you understand how to trade them in a right way. However, it is necessary that at least you have to make sure that you are putting yourself in a position in order to make money with the inside bar pattern.

The three errors below are the costliest mistakes that I see traders making with the inside bar pattern. It is very useful that you read on to learn what they are and how you can avoid them as well.3 Common Mistakes When Trading the Inside Bar Strategy3 Common Mistakes When Trading the Inside Bar Strategy1

  1. Do not trade inside bars on the daily chart

Probably, you have read some of my articles on daily chart trading, if haven’t read, you should do that. It can be said that the daily chart is the strongest and crucial time frame for a price action trader. So, that said, I do teach and trade some price action signals on the 4 hour and 1 hour charts if a signal forms on those time frames agreeing with my entry criteria.

Nevertheless, for price action pattern to trade on the daily chart time frame, I ONLY choose the inside bar pattern. And, my main reasons for this as below:

  1. An inside bar which is on the daily chart indicates a period of consolidation on the lower time frames and that shows a potential breakout from this consolidation is coming. You can see there is much more significance with a daily chart inside bar than one on a lower time frame for the reason that it ‘smooths’ over all that sideways chop and consolidation on the 4 hour and 1 hour (or lower) charts and simply represents it in the form of one inside bar pattern or inside day. This gets rid of a lot of confusion, over-analysis and second-guessing, which leads to over-trading on those lower time frames, generally. A choppy / sideways market is the most difficult to trade and you need to remember this. So, for removing sideways chop on the 4 hour, 1 hour or lower time frames, this is very simple just by seeing an inside bar on the daily chart will save you lots of money and anguish in the long-run as well.
  2. In fact, there are a lot of, a lot of inside bars on time frames under the daily, and a lot of false-breaks of them happen. Shortly, they are obvious too hard to trade on time frames under the daily since there are a great deal of insignificant ones, and they fail to worth your time or money on these lower time frames, definitely.

If looking at the two images below, you will see the power of the daily chart and why on the daily chart time frame I only choose to trade inside bars. You should notice that all the sideways movement on the 1 hour is simply represented as one inside bar pattern on the daily chart, which performed quite nicely as a sell signal in this example. Besides, need to notice all the 1-hour chart inside bars, factually, most of which failed. You just can’t try to trade all those inside bars on the 1 hour.

2. Remember not trade inside bars with the daily chart trend

As discussed above, I prefer inside bars with the daily chart trend and on the daily chart. It is very hard if trying to trade inside bars against a daily chart trend, particularly if you’re a beginner or relatively new in this field. Let’s see, it can be done, it, however, shouldn’t be tried until you are really comfortable and successful in trading inside bars WITH the daily chart trend, and notice that it should only ever be done from key chart levels.

As you can see, an inside bar is best traded as a trend continuation pattern on the daily chart. Also, they can be thought as ‘breakout’ plays and can supply a very good risk reward that is potential to jump aboard a trending market as after a short pause or consolidation, it resumes its movement.3 Common Mistakes When Trading the Inside Bar Strategy2

3. Use too tight of a stop loss3 Common Mistakes When Trading the Inside Bar Strategy3

Sometimes, it can be a mistake if placing your stop loss just above or below the mother bar high or low of an inside bar. As placing stop losses, you cannot place them based on greed, it means, you can’t place them too close to your entry just for the reason that you have an intention to trade a bigger position size. You need to logically place them, where they have the greatest chance for not being hit by the normal daily fluctuations in price.

I recommend you to have a check of the average true range of the pair or market you are trading and at least, ensure that your stop loss is outside of that as well as beyond any near-term or nearby key support or resistance levels. This might have a meaning that reduces your position size to meet a wider stop loss distance (to maintain your 1R risk amount), but if that is what it takes in order to profit on the trade, thus, that’s all you should care about.

As I mentioned in the recent article on ‘how to trade with a small account’, notice that you can’t be so concentrated on making money you give up appropriate trading habits (as proper stop loss placement). With proper trading habits, they are what lead to the long-term success in the market, whereas mostly concentrating on ‘profits and rewards’ will lead you to lose your focus on appropriate trading and eventually will cause you losing money.

For your needs of learning about how to trade the inside bar and other price action patterns properly, you can check out my price action trading course to get more information.