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.
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.