Inside Bar trading method

This strategy is a quick and easy way to day trade currency pairs without having to screen watch from morning ‘til night.

This strategy was developed a few years ago now for a student who I was training  1-2-1 and wanted to day trade but didn't always have the time to monitor the charts due to his regular work commitments. It is in essence a variation on the Asian Break Out Method

The rules to this system are simple, and executing and managing trades will take no more than five minutes of your time. The only tricky part is bringing your knowledge base up to speed with the strategy so this becomes a five-minute process. This can be done in under a couple of weeks.

In this guide I’ll briefly introduce you to the four simple steps below. Then I’ll take you through some worked examples in order to illustrate just how easy this system is. At the end of this guide I will recommend a number of places where you will be able to put what you’ve learned into practice.

This trading method involves four simple steps.

1. Identify a trading opportunity
2. Select a direction
3. Place your trade
4. Manage your trade later – at a specific time

1 - First of all you need to identify a trading opportunity. This should be done at 06.00 UK time. And will normally come in the form of an inside bar. NB: An inside bar is a bar in which its high/low range is inside the high/low range of the previous bar (Glossary – a).

At this stage you need to mark up the 8 hour price bar between 22.00 the previous night and 06.00 the following morning. This is called the overnight range. You need to mark up the highs and lows of this bar with two horizontal lines. This will be your entry bar.

2 - To select a direction you need to look at the bar immediately prior to your entry bar – between 14.00 and 22.00 the previous day.

• If the bar closed higher than the open – look for a long entry
• If the bar closed lower than the open – look for a short entry

3 - Now you simply place your trade.

If you identified a long opportunity – place a buy order above the high of the inside bar, with your stop loss order below the low of the inside bar.

If you identified a short opportunity – place a sell order below the low of the inside bar, with your stop loss above the high of the inside bar.

• The entry order should be 10 pips above the high for a long trade and 10 pips below the low for a short trade.
• The stop loss order should be 5 pips below the low for a long trade and 5 pips above the high for a short trade.

4 - After placing your trade you can forget about it until 14.00 – when you will need to go back and check on it. You will then either:

• Cancel the orders as they have not been triggered

OR

• Raise your stop loss to 10 pips below the closing price at this time for a long trade
• Lower your stop loss to 10 pips above the closing price at this time for a short trade.

You could simply close the trade at this time – however – continuing will keep the trade mechanical and permit accurate back testing.

It is advisable to move the stop losses in the manner indicated above as this will lock in the majority of profit for the trade at this time of the day. It will also give the trade the opportunity to develop a little further throughout the day. More often than not the trade will be stopped out – however – you can also capture a larger portion of any potential moves that come later.

Example 1: A Standard Trade

1. Identify the trade at 06.00. Set up your inside bar.
2. Mark up the highs and lows of this bar to set your entry and exit levels.
3. Select a direction. The bar prior to the entry bar closed higher than it opened. This is known as an up-bar. This means you need to go long. Place your entry order 10 pips above the high level market at 1.9897. Place your stop loss 5 pips below this at 1.9863.
4. Check your trade at 14.00. Raise the stop loss to 10 pips below the closing price at 1.9926.

The trade was later stopped out and a profit of 29 pips per contract was achieved. Your risk on this trade was 34 pips. As you can see the risk versus reward ratio is practically the same. This is a typical type of trade.

Example 2: A Swing Trade

A common occurrence with this type of trading is that your trade can be converted into a swing trade (Glossary – b).

This can happen when your trade doesn’t get stopped out. All you need to do in this case is simply move the stop loss (technically now a stop profit as you’ve locked in a profitable trade) to under the lows of the 8-hour bar for a long trade and above the highs of the 8-hour bar for a short trade.

There is then nothing to do until 06.00 the next day. You need to check the trade at 06.00 and 14.00 (which would be when you’d be looking for new trades anyway); and at 22.00. Checking up on the trade will take 30 seconds each time – and you need to simply check the low/high of the last 8 hour period and move the stop order accordingly.

Below is an example of a day trade that I was in on, which converted into a swing trade.

The entry comes from an inside bar for a long trade. Entry was 10 pips above the high entry at 1.9717, with the stop loss 5 pips above the high entry at 1.9681. At 14.00 the stop loss was adjusted to 10 pips below the closing price – but was not stopped out.

With each new 8-hour bar I raised my stop loss up to 10 pips below the low in order to lock in more profit on the trade.

After five days the trade was still open and another entry was triggered. By following the same rules as before I managed the trade the same way – but this time, managed the whole position in this way. At 14.00 on the 5th day of the trade I raised my stop loss to 10 pips below the close, at 1.9926 – which was eventually stopped out for a total move of 209 pips.

As you can see from the chart there were a few other entries available to add into the inside bar set ups (which I took – but for simplicities sake haven’t highlighted on this chart). But even from the original entry you can see that great moves can be made off of the back of the initial trading entry.

Example 3: A Multiple Trade

You can actively seek out swing trades and multiple entries (Glossary – c) – with multiple entries comes the opportunity to manage your trade in a different way. In effect when you get your stop loss signal you can split your trade up to both hedge your bets and go for higher profits.

You will be doing nothing different with the way you set up and spot trading opportunity’s – you will merely be managing the trade slightly differently to maximise its potential.

The way I like to do this is to tighten up 2/3rds of my position in the usual fashion and leave 1/3rd open with a stop loss at the entry level at which the trade is currently (trading) at. That way if you get stopped out at 2/3rds of your trade, you will still have 1/3rd open with enough breathing space to offer up additional profits.

You have to remember that there is no right or wrong way to money-manage this type of trade – it is purely up to your individual comfort level. I will endeavour to offer up some other examples of how you can manage your trades more mechanically.

You can tighten up your stop loss on the swing trade but give a wider stop loss on 1/3rd of the trade – for example 40 – 50 pips (providing you are that much in profit).With each new signal – if one is generated – re-apply the same process; tighten the add in portion of the 2/3rds trade to 10 pips behind the closing price at 14.00, and move the remaining 1/3rd (as well as the previous / original entries) to the last entry level.

In the chart below you can see how the swing trade would develop.

You can see the original entry position and two add in trades (using the same inside bar entry method); and as per the rules you are trailing your stop losses accordingly. On the 3rd  entry you would raise your stop loss position to 10 pips below the close on 2/3rds of the new position and then move your remaining position to the last entry level. So now all your trades are at the last entry level – two of these profits have been locked in; and the other one will break even if stopped out.

Example 4: 60 Minutes Trades

One problem you may come across is that you might not have access to these types of 8-hour bars (depending on who your broker is) – or if you do – the bars may not match the times I’m using.

This is why I’m now going to show you how to use the same set-ups on a 60-minute chart – which will still be a 5-minute decision.

Here is an example of how to set up a 60-minute trade

• Mark up the 05.00 – 06.00 for the current day, the 13.00 – 14.00 bar and the 21.00 – 22.00 bar for the previous day.

In the chart you can see these highlighted with vertical lines.

• Mark up the highs and lows of the price action for each of those periods. You will be able to see instantly if there is a trade or not. The high / low range of the 22.00 – 06.00 time period should be within the 14.00 – 22.00 high / low range as you can see above. If not there is no trade set up.
• As before you then select the direction. The closing price 22.00 is lower than the opening price of 22.00 – this means that you need to be looking for a short entry.
• Your entry has been marked up and is 10 pips below the 22.00 – 06.00 low. The stop loss will be 5 pips above the high of this time period.
• So entry is short at 1.9758 with a stop loss of 1.9796
• At 14.00 note the closing price and move the stop loss down to 10 pips above this price. In this example it will be moved to 1.9667
• The trade was stopped out shortly after the stop was adjusted and a profit of 91 pips was realised.

Other Considerations.

The best piece of advice I can give to new traders or trading looking at this style of trading is to work backwards.

• What time do YOU have available to trade? 

This pattern allows you not to be screen watching all day but, what if you don't want to trade at 6am (UK hours) in the morning or can't? Then don't. Use your start time at for example 8am (UK hours).

Are your finding your being stopped out at the 14:00pm (UK hours) decision time with a 10 pip stop past the close when 20 pips would have kept you in the trade longer and for a larger price movement? Adjust the rule and use a slightly larger stop loss size or reduce a portion of the position (take some profits, also called scaling out) or both.

Similarly, using the same rules for GBPUSD and GBPJPY, you might find that you are not capturing the best of the days movements on GBPJPY but you are on GBPUSD. It might be that you need to adjust the rules for the trade management on GBPJPY to compensate for the larger volatility of movment that this pair has.

1. Be flexible and make the pattern your own.
2. Adapt the rules to suit your own purposes and the currency pair you are trading.

Glossary

(a) Inside Bar: Although the continuation method of the inside bar is one of the most common methods of selecting a trade. When trading things like EURYEN – it is common variation is use reversal bars: Basically these are candlestick bars or hammer bars – which I will explain below.

Candlestick Reversal Bars: The method of selecting a trade is practically the same. You compare the entry candlestick with the previous candlestick as you would with the inside bar but the direction of the trade is the opposite with a reversal bar. (see Candlestick diagram below)

With this variation instead of an inside bar you are looking for a reveral bar or in candle stick terms a hammer/shooting star. The only differnce with the trade is the selection of direction.

• If the bar closed higher than the open – look for a short entry
• If the bar closed lower than the open – look for a long entry

(b) Swing Trade: This is a trade that continues for more than one day.

(c) Multiple Entries: During a swing trade you will often find multiple entry signals as the trade progresses (through using the inside/reversal bar method), you can use these to hunt out extra profits.