Picking your shots
Depending on the context of the market, inside bars can be used to confirm price trends or to fade support and resistance.
For example, a common challenge of breakout trading is that the moves are so explosive they can catch traders unaware, and by the time the trend is clear, a reasonable entry point is history. Inside bars, however, can clue you into the potential move at a more opportune moment.
Once price begins to pull back, any inside bar formed during the brief lull will provide a compelling entry point. A buy entry over the high of the inside bar in a bullish market or a sell entry below the low of the inside bar for a bearish market are reliable entries in the presence of strong price trends (see “Buying the dips,” below).
Trading bounces off support and resistance levels is one of the most reliable and well-known technical trading methods. The reason this approach works is that price zones are defined clearly, and they offer high-probability trades. Inside bars are an excellent supplemental indicator, adding evidence to the likelihood that support or resistance will hold, allowing a low-risk entry.
Once an inside bar occurs at a support or resistance level, place an entry order above or below the formation with the expectation that the price level will bounce accordingly. When the pattern forms in either price zone, it is further confirmation that a short-term reversal is imminent. An entry at the upper level of an inside bar off support is one of the most reliable and simple bullish technical trades you can make — and the opposite is true for bearish trades off resistance.