- March 1, 2022
- Posted by: CoachShane
- Category: Trading Article
The double inside bar strategy takes advantage of a slightly longer term consolidation in the market. A saying that goes “the bigger the brick the bigger the break” describes what we expect for a double inside bar break.
If you agree with that saying, then a multiple number of inside bars should bring a bigger break. While that may be true, we are going to focus on the 2 inside bar candlestick pattern and remember, depending on the timeframe, they may have more meaning.
If this were a daily chart, the 3 bar price action pattern would have had two full trading session forming the inside bars.
- The red candle is the mother bar
- The next candle can’t break the high or low of the mother bar
- The last candle is unable to break the high or low of the first inside bar
A five minute chart would have had 10 minutes. Knowing this, is stands to reason that using a higher time frame may have a better edge than using a small one. Lack of volatility on a bigger time frame carries more weight that a short time frame
Double Inside Bar Formation
Let’s cover the basics of inside bars so we are talking the same language.
When these bar patterns form, we are looking at decreasing volatility in the instrument you are trading. There is no clear winner in the buyer/seller battle.
But to have that, we need to have a prior imbalance of buyers and sellers which is why we much prefer inside bars that take place at either potential turning points or in a strongly trending market.
When using ranging price action, we are missing the main ingredient in how these setups works: momentum.
We need momentum (strong imbalance of buyers or sellers) to break the support or resistance level of the inside candle. These levels are the high and low of each candlestick.
Let me say that this trading strategy is different than a range trading strategy.
In a range trading strategy, we are looking to ideally position before the breakout of the consolidation pattern inside of a basing formation. These inside bars, are simply brief pauses.
Compare that above graphic to this one.
That is not to say that the original graphic can’t resolve into this last one which is why we put the odds in our favor by:
- Looking for the double inside bars during a strong trending market
- Trading the price pattern at potential reversal points such as previous swing levels
The formation of the double inside bar could be part of a trading plan for a trader that states: Once a double inside bar setup fails to trigger, the trader will either move on to another instrument or use a range trading strategy to take advantage of pending price movement.
Don’t think that you must trade ranges. There are plenty of other trading opportunities available in other instruments.
Double Inside Bar Trading Strategy Details
It is not a complicated setup to trade but there is one trading tip I will give after a simple example.
First strategy step:
- Find a market that is trending
- Find a market at a potential turning point
In this example, price was in a consolidation and broke out to the downside and ran into prior support.
Keep in mind that price that breaks out of a range will usually go back to test the breakout level.
The mother bar hits support and we get our 2 inside bar setup.
How do we enter the trade? Second step.
Unlike most instruction where you take a mother bar breakout for an entry, we won’t Instead, we are going to buy stop the break of the high of the second inside bar.
Price target and stop loss
We will have 2 price points that we will pay attention to when considering our profits.
The first price point is the high, in the case of a long, of the first inside bar. You could scale out profits, take all profits, or use that zone as an adjustment for your stop loss.
In this double inside bar example, you would have been break even on the trade. There was not much profit to be had at the first level.
Your stop loss is up to you: use the low of the second inside bar, use the low of the breakout candle, use the low of the inside candle but exit if the breakout candle begins to fail.
I intentionally picked a non-stellar example. We would fully expect some type of rejection when price returns to a breakout level. It’s the concepts that are important and not how each example trade here played out.
Let’s look at another trade example.
This market is trending up and you can see the green candles outsize the red ones. Buyers are obviously in control especially as the market makes higher highs and lows.
We have our mother bar form and our 2 required inside candlesticks.
Price breaks up and hits are initial targets.
Do you have to exit?
Each high or low of a candlestick represents, at least in the short term, an area of support or resistance.
Our double inside bars are short term consolidations and we can expect that when they break, the odds are they will reach the high or low of the mother bar.
Each trader will have to measure their own appetite for trailing stops and there are many ways to do that. One way is to simply use the high or lows of each candlestick to trail up the stop.
Does Trend Matter?
Trading with the trend does give you a chance to make large gains but don’t discount this strategy for a counter trend move.
In this example, I put on a 50 EMA so you can see that market is strongly trending upwards.
Price forms a range and then rockets to the upside to break out over previous resistance. If you study trading breakouts, ones that start at the bottom of the range to break out, usually fail. We like to see basing under resistance for an upside breakout and above support for downside breaks.
The fact that there was not enough buying pressure and price could not continue to the upside after the strong momentum push, gives a heads up a reversal trade could be in order.
Keep expectations in check, taking profits at the second dotted line (potential support level of the mother bar), this was a $9 price move per share.
One more example – double inside bar day trading
Keep in mind that when day trading, the moves to the profit targets won’t be as large. In that case, you may want to go to a higher time frame and see out other highs (in the case of longs) that may be taken out.
This is a 30 minute chart and you can see price is basing under a previous high. This is what I look for with breakout types of trades. To me, the basing is important as it shows that the sellers have not been able to drive price back down when we are in an uptrend.
You can see our 3 bar pattern set up and the entry price is at the break of the $82.64 high. Price easily reaches a small target.
Since the target was small, we scroll out to the daily chart and we see the next daily high to take out is $86.33. You would manage that trade as it makes it’s way up or exit if you get an obvious reversal. You could even look for a 2 bar inside setup and get out if price breaks to the downside.
The double inside bar strategy is a strong price action approach to trading the markets. The bonus is having built in profit and stop loss targets that give you the opportunity to exit.
It is a flexible strategy as any time frame is appropriate. The tradeoff, as we just saw, was day trading will give us less bang.
I don’t think adding other indicators will add much to the effectiveness of it. Why? The basic strategy is looking for quick price targets, we are not interested in oversold/overbought and we can see momentum in the candlesticks.
In fact, the appearance of a double inside bar is a pure sign that momentum is not in the market.
We want to take advantage of it when it does re-enter the market which is why we will trade off the second inside candle.
If you want to see a similar concept, make sure to check out the article: The Triangle Chart Pattern Guide.
What Is a Double Inside Bar?
The double inside bar is a series of candlesticks where price forms back-to-back inside bars.
Where would the stop loss be placed?
The stop loss would normally be placed on the other side of the inside bar pattern.
What is the entry type?
Since we are trading a breakout of the second inside bar, using a pending order is good practice although you could hit a market order if watching the market.
What are Support and Resistance Levels?
Support and resistance levels are horizontal price levels that typically connect price bar highs to other price bar highs or low.