Price Action Trading

There are a wide range of simple yet effective strategies that we suggest beginner traders try out upon first entering the waters of Forex trading. Among these strategies are various methods and styles incorporating everything from classic indicator trading through to looking at market information and underlying flow, one element that we constantly refer back to is price action.

Simplicity will always serve you best in trading and it really doesn’t get much simpler than price action. The term is banded around a lot by traders and market spectators and often people will be referring to slightly different things, however, at its core, price action trading is simply executing upon the belief that everything you need to know about the market is included right there on there chart in the price action we can see with each candlestick that forms.

Now whilst we don’t necessarily agree completely with this notion, as it’s the underlying order flow that actually drives price action, price can to a certain extent give a decent glimpse into that very underlying order flow and afford us trade-able opportunities.  Even within price action trading itself there are a number of different elements to focus upon but for this article we are going to concentrate on one of my favourites; the inside bar.

 

The Inside Bar

The inside bar or inside candle is an incredibly simple little strategy to work  on and can give really great results. Essentially all we are looking for is a candle to form (inside bar) within the high and low of the previous candle (Mother candle). So really the pattern is the opposite of the engulfing candle where we’re looking for a candle to form which completely encapsulates the preceding candle. The inside bar formation looks like this

Inside bar

Notice how the bullish candle forms within the upper and lower limits of the preceding candle?  this is our inside bar.  This formation often occurs before price sustains a breakout and usually the more inside bars that form, the better the breakout as a consequence.

Inside bar

In the example above notice how price forms several inside bars within the range of the Mother candle before price finally breaks down?  This is a really great setup to keep an eye out for and can yield really good results. So why does the Inside bar breakout play occur?  Well the reason why this specific price action dynamic exists is the same reason behind all of the various price action formations we see: Order Flow.

As price moves into an area of equilibrium and starts to consolidate within a range we tend to get orders building on either side of the range. Eventually one side wins out and we see price breakout, exactly as shown in the examples above.  One situation to be wary of however is the fake-out.

 

Beware The Fake-Out

The fake-out is a situation whereby prices runs through one side of the range set by the Mother candle but doesn’t actually sustain a full breakout and reverses to trade back within the range of the Mother candle.  Why does this happen?  Price sustains enough momentum to push out and test the orders on one side of the range but not enough to break through them, causing the reversal.

inside bar

In the example above we have a Mother candle setting our range, we then get a subsequent inside bar confirming our set-up. Price then trades up and tests the sell orders sitting above the range but is unable to break them and indeed reverses back down inside the range. We then get a few more inside candles that show just how pent-up orders are outside the range, before finally price breaks down through the range low erasing buy orders beneath the range.

So for the sake of added confirmation and being more conservative with our trading, we want to wait for a candle close outside of the Mother candle range to trigger a trade, that way we can avoid the dreaded fake-out. Of course, this isn’t to say that waiting for a close will win 100% of the time, because we know that nothing does, but it does greatly reduce the chances of us getting whipsawed!

 

Trading The Inside Bar Formation

Trading the inside bar formation is essentially just a breakout play and as such as adopt pretty much the same basic strategy that we outline for breakout trading.  We look to enter as price breaks the range with a stop 50% the width of the range, targeting at least twice our risk.

inside bar

In the example above we have a fantastic example of a recent inside bar setup in EURUSD. As you can see we got a large bearish Mother candle which set the range, which was respected for five days resulting in a large number of inside bars. We then eventually saw price close outside of the range, closing below the lower limit allowing us a short entry. With our stop at 50% of the range width and our target at 2 x risk this would have been a textbook inside bar play.

In part two we will discuss some key points to consider when trading inside bars as well as take a look at some other ways in which you can trade this formation…


All comments, charts and analysis on this website are purely provided to demonstrate our own personal thoughts and views of the market and should in no way be treated as recommendations or advice. Please do not trade based solely on any information provided within this site, always do your own analysis.

Editors’ Picks

EUR/USD holds steady above 1.1850 as markets eye Eurozone GDP, US CPI inflation releases

EUR/USD holds steady above 1.1850 as markets eye Eurozone GDP, US CPI inflation releases

The EUR/USD pair trades on a flat note near 1.1870 during the early Asian session on Friday. The major pair steadies amid mixed signals from the latest release of US economic indicators. Traders await the preliminary reading of the Eurozone Gross Domestic Product for the fourth quarter and US inflation data, which are published later on Friday.  

GBP/USD consolidates around 1.3600 vs. USD; looks to US CPI for fresh impetus

GBP/USD consolidates around 1.3600 vs. USD; looks to US CPI for fresh impetus

The GBP/USD pair remains on the defensive through the Asian session on Friday, though it lacks bearish conviction and holds above the 1.3600 mark as traders await the release of the US consumer inflation figures before placing directional bets.

USD/JPY rebounds above 153.00 ahead of US inflation data

USD/JPY rebounds above 153.00 ahead of US inflation data

USD/JPY stages a comeback and regains 153.00 in the Asian session, snapping a four-day losing streak amid some repositioning ahead of the US CPI report. However, expectations that Japan's PM Sanae Takaichi could be more fiscally responsible, along with bets that the BoJ will stick to its policy normalization path and the risk-off mood, could support the safe-haven Japanese Yen, capping the pair's upside.


Editors’ Picks

USD/JPY rebounds above 153.00 ahead of US inflation data

USD/JPY rebounds above 153.00 ahead of US inflation data

USD/JPY stages a comeback and regains 153.00 in the Asian session, snapping a four-day losing streak amid some repositioning ahead of the US CPI report. However, expectations that Japan's PM Sanae Takaichi could be more fiscally responsible, along with bets that the BoJ will stick to its policy normalization path and the risk-off mood, could support the safe-haven Japanese Yen, capping the pair's upside.

Gold: Will US CPI data trigger a range breakout?

Gold: Will US CPI data trigger a range breakout?

Gold retakes $5,000 early Friday amid a turnaround from weekly lows as US CPI data loom. The US Dollar consolidates weekly losses as AI concerns-driven risk-off mood stalls downside. Technically, Gold appears primed for a big range breakout, with risks skewed toward a bullish break.

AUD/USD consolidates below 0.7100 as traders await US CPI report

AUD/USD consolidates below 0.7100 as traders await US CPI report

AUD/USD consolidates the previous day's retracement slide from the vicinity of mid-0.7100s, or a three-year high, holding below 0.7100 as traders move to the sidelines ahead of Friday's release of the US consumer inflation figures. In the meantime, the divergent RBA-Fed outlooks might continue to support spot prices amid subdued US Dollar demand, though the risk-off impulse could act as a headwind for the Aussie.

Top Crypto Gainers: River faces resistance, Humanity Protocol steadies, Polygon rebounds

Top Crypto Gainers: River faces resistance, Humanity Protocol steadies, Polygon rebounds

Altcoins, including River, Humanity Protocol and Polygon, rank as top-performing cryptocurrencies in the last 24 hours, defying the broader market pullback as Bitcoin dropped below $67,000.

A tale of two labour markets: Headline strength masks underlying weakness

A tale of two labour markets: Headline strength masks underlying weakness

Undoubtedly, yesterday’s delayed US January jobs report delivered a strong headline – one that surpassed most estimates. However, optimism quickly faded amid sobering benchmark revisions.

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