Inside Bar Trading Strategy

Strategy #8: Inside Bar Trading Strategy

This inside bar trading strategy uses multiple time frames to trade intraday from an inside bar pattern formed on a daily chart.

First lets review the Inside Bar pattern . An inside bar occurs on a chart, on any time frame, when the bar's range is completely contained within the high-low range or boundary of the preceding bar.

Below is an image of what an inside bar pattern looks like. You won't have any trouble locating this pattern on daily charts, even by just eyeballing end of day charts. If you don't want to scan manually over many charts, there certainly software that will perform the scan for you.

Image of inside bar

REDUCED VOLATLITY

Inside bars on any price chart represent an immediate reduction in the amount of price action volatility. They often form after a period of price expansion and higher volatility and can lead to the formation of laterals, triangles, and tight consolidation areas.

These areas of reduced volatility are a gift to alert traders. They represent "squeeze points" and offer important support and resistance levels that you can use to your advantage.

Why are they important? Because, areas of squeezed or reduced volatility generally lead to areas of price expansion, which if you're a part of, can lead to significant profits.

Some traders watch for inside bars specifically to catch reversals. I never cared about that. I only cared about the price expansion coming out of either end of the inside bar. Which way it goes I don't care..... as long as it goes, and goes big.

INSIDE BAR TRADING STRATEGY OVERVIEW

What you're looking for with this inside bar trading strategy, is an inside bar that has formed on a stock's daily chart at the end of the day. Once found, that stock can be kept on a watch list for the next day for a potential breakout of the inside bar's range on a 5 or 10 minute chart.

Which way it's going to break out, no one knows. If price gets close to the inside bars major support or resistance levels, you can place a buy or sell stop order to get you in should it breakout.

Generally, inside bars that are also Narrow Range Bars (NRB's) perform better when using this technique. If you'll recall from the tutorial on price indicators, NRB's are bars that have a smaller high-low range than other recent bars on a chart.

Combine the reduced volatility of an inside bar with a very tight range NRB and you've possibly located the bottled up potential energy of a great expansion trade.

HOW DO YOU FIND INSIDE BARS AND NRB's?

One way to find inside bars and NRB's on daily stock charts is manually or automatically scanning charts with the Average True Range Indicator.

Setting the ATR to 1 day, instead of the usual default of 14 days, allows you to easily find stocks to put on a watch list for the next day. The ATR won't always point to an inside bar, but many NRB's just happen to be IB's too.

Another way is to use online services to to scan stocks for the IB pattern or you can just create your own scan using most backtesting software.

THE DAILY CHART

Lets go over an example of the inside bar trading strategy. The green oval in the following daily chart of GT displays an inside bar on Dec 3rd. It's not the narrowest bar on the chart, but not too wide either, so GT could be put on a watch list for the next day.

At this point, you'd have no idea which way GT's going to break out or even if it'll breakout at all the next day. If by some chance it didn't break out the next day, and formed an even smaller NRB, then you'd really want to keep on eye on GT the next day.

Stocks in the S&P 500 (GT is a component) have big volume and are only going to stay in a constricted, tight range for so long, before they expand to new support and resistance levels.

Example 1

Stock Chart indicating inside bar

THE TEN MINUTE CHART

Alright, so if you had GT on your watch list the next day (Dec 6), you would've seen GT (on the chart below) open within the range of the inside bar. That's a good thing. If it had gapped up out of the range of the inside bar, you'd pull it from being a potential Strategy #8 candidate and put it on one of the gap up techniques watch lists.

Since it didn't gap up or down......and a lot of them do, it stays on the watch list as a chart to watch during the day.

On the second 10 min. bar, GT got close to the inside bar's boundary (shown in yellow), so a buy stop order could be entered at this point.

As you can see, GT later broke out on that bar and proceeded right up to the control bar's resistance, where it immediately stopped, hesitated and formed a lateral before moving on to higher levels.

Example of Inside Bar Strategy on Chart of GT

EXAMPLE 2

inside bar on daily chart of RDC Inside bar day on price chart of RDC


Obviously, they don't all work out this nicely, but that's what stops are for.

If you haven't gone over the material on Stops or need to review, you can find it on my Stock Day Trading System (The Stop) page.

Or you can review all basic day trading system components.