Observe any world-class sprinter in training. He will speed down a track in obsessive pursuit of a faster time but occasionally will break and rest before resuming his charge. Often, its during these pauses that the athlete recovers his physical stamina for a perfectly timed surge designed to deliver a superior finish.
In trading, price behaves similarly, moving from periods of expansion and trends to periods of contraction and stability. During these pauses, opportunity can be found. It’s here that traders can identify low-risk entries using a particular price pattern that marks both reversal points and continuation moves.
Inside bar patterns refer to times when the high of a price bar is lower than the previous bar’s high and the low of a price bar is higher than the previous bar’s low. Inside bars reflect reduced volatility in the commodity or stock and identify periods of contraction. Such periods are common when a price has experienced a sustained trend, followed by a shorter-term reversal, but they can occur at any time.
Inside bars can be found on any time frame, and often the pattern precedes a significant price move. Inside bars reveal price points where the ascent or descent of price action is in question. Traders participating in the stock’s trend are at an impasse, and that indecision results in a lack of movement until the bulls or bears assert themselves and take control of the trend (see “Inside Apple,” below).
Multiple inside price bars are a phenomenon that occurs when neither side of the market takes control for subsequent trading sessions. Price meanders with no conviction, typically after a strong run up or decline. Similar to a widely accepted tenet of channel trading, the longer the sideways action, the stronger the expected break in price once that break occurs.
Although the application of inside price bars seems simple, there are some key distinctions that traders must keep in mind to use this method effectively.