For binary options traders, when considering what type of trading strategy to adopt, there are a number of guidelines that the strategy should meet.
- Entry conditions (or market direction for binary options traders) should be clearly defined and identifiable.
- High probability success rate.
- Statistical edge. That is, the strategy should have proved itself to be profitable over a given period.
- Reward should outweigh risk.
- Adaptability, that is, the strategy should be tradeable on various timeframes, products and market conditions.
Because binary options traders are not concerned with the size of the price movement, but rather the direction, an Inside Bar trading strategy provides clear direction and entry point signals, improving a trader’s opportunity to profit.
What is an Inside Bar?
An ‘inside bar’ is a two candle formation which occurs when an entire bar’s price action range (Open, High, Low and Close) is contained within the High/Low price range of the preceding bar (sometimes referred to as the ‘mother bar’ or ‘outside bar’). That is, the inside bar should have a higher low and lower high than the outside bar.
Why does an Inside Bar occur?
Inside Bars is considered a ‘breakout’ and/or ‘reversal’ strategy indicating either a period of indecision or consolidation and typically occurs when (a) the market consolidates after making a large directional movement or, (b) at turning points in the trend at key decision points such as support/resistance levels.
When acting as a reversal signal, a pause in the upward (or downward) trending price movement (represented by the Inside Bar) signals a trend reversal whereby volatility increases and price reverses.
When acting as a breakout signal, traders will identify a period whereby price and upward (or downward) momentum surge followed by an Inside Bar which represents a period of consolidation. A breakout trade opportunity in line with the current trend follows immediately after the Inside Bar.
How often do Inside Bars occur?
Although Inside Bars are effective as a reversal strategy, they are considered to be far more effective when traded as a breakout strategy (trading with the trend). Using a recommended daily 1 minute price chart to eliminate false breaks and signals (but at a minimum a 240 minute price chart), Inside Bar formations occur approximately 10% of the trading time.
How to trade an Inside Bar
For binary traders, there are two ways to trade an Inside Bar setup: As a continuation (or breakout) signal or a reversal signal.
For binary traders trading a continuation (or breakout) strategy, on the uptrend, a CALL trade is placed on the bar immediately following the inside bar only on an upside breakout of the mother bar high. If the dominant trend is downward, a PUT trade is placed on the bar immediately following the inside bar only on a downside breakout of the mother bar low.
For binary traders trading a reversal strategy, an Inside Bar Bullish Reversal indicates a possible reversal of the current downtrend to a new uptrend. An Inside Bar Bearish Reversal indicates a possible reversal of the current uptrend to a new downtrend. If the inbound price trend is up, then upon identification of an Inside Bar, taking a PUT position is recommended. Conversely, if the inbound price trend is down, then upon identification of an Inside Bar, taking a CALL position recommended. For binary traders looking for trend reversal confirmation, the length of the mother bar relative to the inside bar indicates the strength of the underlying momentum. A long mother bar suggests the prevailing trend has climaxed and will dissipate. While a smaller inside bar (relative to the mother bar) signals a dramatic change in the buyer/seller balance and therefore a stronger trade signal.
Responsible money management ensures that the losses don’t mitigate the profits.