Candlestick patterns are the most reliable tools used by Forex traders. And price action traders very frequently use off-bar and in-bar trading strategies. If you want to determine your entry and exit points in the market, you need to understand these trading signals. In this article, we will show you how these patterns are formed. Additionally, we will look at how to spot and implement these patterns as they emerge on the chart. Let's start with an explanation of bar charts in general.
What is a bar chart used for?
Bar charts are useful tools in technical analysis and therefore asset trading. It makes it possible to collect various useful information, in particular to identify market trends in terms of prices and, therefore, facilitate decision-making between buying and selling in a given market.
A bar chart allows you to know the opening and closing price and the price variation in a given period, depending on the chosen periodicity. Thus, reading a bar chart allows you to position yourself in a market with experience.
Indoor and outdoor bar trade
What is an external bar in trading?
It is a very useful reversal pattern in precise action trading in the Forex market. This candle pattern wraps around the inside of the bar candle. It shows a significant reversal in the market trend.
Market conditions for foreign trade of bars
The outside bar pattern appears on a chart once there is a little indecision in the price movement. Generally, the price difference moves away from the previous closing price. And it gives traders the impression that the recent market trend is still continuing. Despite this impression, the price difference is covered very quickly. Once the closing time has arrived, the price is outside the previous day's opening.
This sudden price fluctuation can leave investors feeling cheated and stuck when a price they thought was following a certain trend turns out to be incorrect at the end of the day. The formation of an outside bar candle indicates a change in investor attitudes and beliefs throughout the day.
Bullish and bearish trading outside the bar
Bullish patterns follow two key rules. First, they must arise during a market decline; (Otherwise, they are considered continuation patterns). Secondly, most bullish reversal patterns need confirmation from bullish signals to be confirmed as such.On the contrary, like bullish patterns, bearish patterns need confirmation of bearish signals. Bearish reversal patterns can be identified by one or more candles. These patterns indicate that selling pressure exceeded buying pressure over a period of several days.
Rules for entry and exit of candles from the outside bar
Follow these rules in order: risk no more than 1% of your account, buy at a penny above the bullish pattern, set stop loss at 2x the ATR indicator value, first profit target at 2x ATR, close half of position at initial profit target, use trailing stop loss, move stop loss to break even, close manually if price reaches 7 times original risk.
Outside Bar Trading Strategies
Reversal strategy
Once the trend ends, you can spot the following chart pattern: A long momentum candle is followed by a drop in momentum, indicating a lack of trend support.
A downtrend usually ends abruptly when several small inside bar candles appear after the long momentum candle.
After three consecutive inside bars, there is usually a sudden change in momentum, with a powerful outside bar driving the price higher. This is a common reversal pattern that clearly demonstrates the change in momentum.
Trend continuation strategy
During retracement phases, external bar sequences can indicate that the trend will continue. Consolidations occur when the market temporarily moves sideways during a trend.
The trend resumes when buyers or sellers regain control and push the price in the direction of the original trend. Outside bars often indicate momentum in the direction of the trend, suggesting that more momentum is likely to follow.
Naturally, market trends do not last, so limiting trading on the first and second pullbacks can neutralize the risk of jumping into the trend when it is too late.
What is an indoor bar?
The inside bar is a technical figure composed of two candles. A first candle (A) is followed by a candle (B) whose height is less than the height of the first candle AND the low is greater than the low of the first candle.
The price accelerates when an inside bar pattern is broken. This is explained by the fact that the inside bar indicates a consolidation phase. A consolidation phase is a bit like the calm before the storm. The inside bar can serve as a trend reversal pattern. But we will use it as a continuation figure.
As with outside bars, you can find bullish outside bars as well as bearish outside bars.
In a bullish outside bar candle pattern, the price falls below the lows of the previous candle before closing above the highs of that candle. Conversely, in a bearish outside bar pattern, the price rises above the previous candle's highs before closing below its lows.
Inside Bar Strategies
In trading, the inside bar strategy is a simple approach that, when applied correctly, produces good results.
This strategy can be used alone but it is also possible to combine it with other strategies.
Range Trading
The inside bar pattern can be traded in a variable market. The Relative Strength Index (RSI) can be used to confirm trends or reversals. The pattern consists of a sharp move followed by a bullish candle and then a bearish candle.
When the inside bar pattern emerges, the RSI ranges between 40 and 45, showing market uncertainty and potential for consolidation.
In such situations, you can initiate a trade with the aim of profiting from minor price fluctuations within a specific range, focusing on support and resistance levels.
Breakout Trade
The inside bar breakout trading method involves identifying an inside bar formation with a large bullish candle followed by a smaller bearish candle, and then looking for a third candle that rises above the second candle to indicate a likely rise. price.
The trend filter: the 21-day EMA
The moving average (EMA) allows us to detect the trend. If the EMA moves up, then it is an uptrend. If the EMA moves down, then it is a bearish trend. An EMA that moves horizontally means that the price is in a period of consolidation. In this case, an “internal bar strategy” does not apply.
Best Time Frame for Domestic Bar Trading
The inside bar pattern will provide the best signal in a longer period of time. But this pattern is more suitable for scalpers and short-term trading in general. Use this bar in a time frame of 15 minutes or less for optimal results. Relying on this Forex strategy, look for the inside bar in a bearish or bullish trend. Then wait for pattern competition and then check the price action using the support/resistance levels indicator. After that, you will be able to detect an internal bar.
The bottom line
Inside and outside bars are two predominant candlestick patterns in technical trading. Understanding the inside and outside bar pattern is crucial for Forex traders. Knowing how to detect them immediately when they begin to form can greatly improve any technical analysis.
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