Inside
day is a widely followed trading strategy for securities with range
bound market movements. It suits forex trading especially because of
nature of price swings in forex markets. Take a sneak peek at Inside
day Breakout Strategy explained by Barry Sendach.
Meaning
of Inside Day
The
inside day is a candlestick pattern made from intraday price ranges
related to Open, High, Low and Close prices(OHLC). However, today’s
OHLC price band lies completely Inside the limits of previous day
band, that’s an inside day pattern also known as inside day bar.
Previous day bar is also known as “mother bar” and today’s bar
is recognized as “inside bar”.
Why
and how do inside day patterns get formed?
Understanding
the reasons behind the formation of such patterns can help trader’s
spot subsequent symptoms. Following are five reasons why inside day
pattern form.
- Trend Reversals
The
probability of inside day pattern climbs up when an asset trades
around support and resistance levels. Around resistance levels,
sellers start taking short positions and buyers start profit booking
for their long positions and vice versa in support levels. In both
cases, trading occurs in a tighter price range as a trend reversal
proceeds from one day to next crafting inside day patterns.
- Breakouts
Before
an asset price breaks any long perceived support or resistance level,
a period of consolidation is observed. At this time, the price is
located at tight range, touching support/ resistance levels a few
times and then breaks down steeply in one direction. Just prior to
this, buyers and sellers should build their positions, leading to
inside day patterns.
- Consolidation during up and down trends
During
strong up and down trends, several inside day pattern develop
sporadically. It is due to the fact that either trader book profits
or add to profitable positions. Losers attempt to cut losses or
average out and new entrants advance, expecting continued momentum.
The net result is a range-bound trading activity, leading to the
formation of an inside day pattern.
- Low liquidity periods
In
online forex trading, even the most volatile and liquid stocks
enter a stagnant phase of low market activity caused by market
sentiment, the macroeconomic situation, less activity by
institutional traders or a holiday season. These periods lead way for
inside day pattern formation.
How
to trade inside day pattern
Inside
day pattern often arises, but the matter of fact is that all inside
day patterns are not profitable, therefore pay heed to following
points mentioned below.
- The frequency of trading inside bar pattern varies according to the trader’s preferences, which can be used hourly, daily or weekly basis.
- Choose instruments that have high liquidity and high volume trading especially major currency pairs that are often used by large institutional traders to construct substantial positions.
- Although going against the trend is tempting for many traders, but for the inside day breakout trading strategy it is better to follow trend.
- It is best to make an entry for breakouts when momentum is high. However to anticipate reversals, it is recommended to take a position opposite to the current trend.
- Inside day trading should be avoided during low liquidity periods.
The
simplicity of Inside day trading strategy makes it popular to use in
online forex trading.
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