I asked if anyone wanted to guest post for me and Miad (@ZFXtrading) responded with a great post on how to trade inside bars.
Take a look at his other content at www.this-is-forex.com. Some cracking stuff on volume spread analysis, a particular method that I incorporate in my trading.
To trade Inside Bars and swing trading it is a lot about doing nothing and sitting on your hands. Then when the setup comes it’s everything about execution and continued sitting on your hands again until markets treats you to a TP or slap you with your SL. Insidebars are born out of lacklustre and failure of market participants to break the previous seasons price range. Statistically insidebars and the inevitable breakout give a 50/50 chance of success. Where success is measured by yielding more or at least equally as much as you risked losing. But there are rare moments and in particular Certain environments where IBs are the calm before the storm, the build up before the momentum stretch and that’s where IBs get their reputation from. Catching that explosive move with a tight stop is everyone’s desire big or small players and IBs open up such provocative opportunities.
Wicks are arrows
Now in order to separate poor setups from roulette once you want to understand the power of wicks. Every candle wick tells a story, mostly a boring one without any substance just like my old uncle. Nevertheless it has direction, and in a cluster of unbiased spikes these wicks become your beacon of light. If there are dozens of candles arrayed like sardines in a tin with obvious wicks pointing up the way then that’s because market participants are interested in higher prices. While everyone else is busy trying to figure out what’s going on, you can shape a bias based on price strength at the wicks.
Collectively wicks are pointing lower and a sense of sentiment only from observing the wicks becomes clear while downside pressure persists.
It is incredible how in this chart example the lows got defended. Every dip got pushed back up leaving wicks pointing higher. In tight ranges like that it is impossible to figure out a breakout direction unless you look for your clues.
Realising that candle wicks are actually arrows and the bigger they are the more meaning they have opens up totally new horizons.
Swing high and low
Breaking down price behaviour into pivots gives us a better perspective. Now pivots with less noise and clusters around them have much more ease and room to flex. Hence when we observe a turnaround point in the middle of nowhere it tends to be a smoother sail as opposed to noisy conditions. So whenever you see price has broken free and leaves generous room to move be advised that it has an equal chance of returning to where it came from. All it needs is a spark, that spark could be an IB.
Bringing it together
When a mother bar and the subsequent insidebar both have wicks pointing lower then a breakout to the downside is likely to advance further. And when all of that happens at a swing high , well you got yourself a golden goose for a trade inside bars.
A recent example on CADJPY 4h IB setup at a swing high, upon breaching the lows price opened up. With open space to move into, price encountered little resistance to drop lower.
After a massive swing lower price consolidated briefly and broke out with the same momentum to the upside right after this lucrative IB setup that offered tight risk management.
Trade Inside Bars management
Dropping a Fibonacci line from the bottom to the top of an IB range will plot 161,261 and 423 extension levels.
And here is the drool, I have forward tested IB setups as outlined above and 7/10 times 161 gets hit in the very first burst and 9/10 times 161 levels gets hit during the lifetime of a trade (mic drop). You’ll see 261 tested 7/10 times which accounts for a RR of 1.6 . Combined take profits will yield RR0.6+RR1.6= RR2.2 with an average strike rate of %70.
