In my own experience, the most important levels that traders should
look for to trade this signal are the following:
-Support and resistance levels, and supply and demand areas
-Fibonacci retracement levels,
particularly, the 50% and 61%
retracement levels.
-21 moving averages and trend lines in trending markets
-Horizontal levels in range-bound markets
Here is an example of how to trade inside bar false breakout in a
trending market:
As you see in the chart above, the market was trending down, that
indicates that sellers are in control of the market, so if you decide to sell the market near the resistance level, all probabilities will be in your
favor.
But the question is when to enter the market? And where to put my
stop loss?
If you enter the market aggressively before the breakout of the mother
candle, and you put your stop loss above it, the market will take your
stop loss and go in the predicted direction.
See the illustration below:
As illustrated above, big players hunt novice traders stops before
pushing the market to go down, if your stop loss was near the
resistance level, you would be out as well, if you don’t understand the
reason why, it is simply because you were a victim of big players
hunting stop strategy.
If you are familiar with trading the inside bar false breakout, you will
understand what happened in the market, and you will simply take
advantage of this manipulation instead of being trapped by the
market. See the example below:
As it is illustrated above, the inside bar false breakout gave us a good
selling opportunity.
If you are able to identify this setup, and you understand the
psychology behind it, there should be no reason not to get into the
position.
Trading inside bar false breakouts with Fibonacci retracements
I don’t really know if you are familiar with this technical trading tool,
however, I will try to show you how to use it in a simple and efficient
way in combination with the inside bar false breakout.
What you have to know is that in an uptrend or a downtrend, the
market creates impulsive moves and pullbacks.
The Fibonacci retracement helps us highlight the most important
pullbacks levels in the market.
The best Fibonacci retracement levels that i personally use are the
50% and 61% levels, according to my experience these levels are the
most important areas that experienced trader watch in their charts.
Our strategy is simple, we select the technical tool on our chart, and if
the market moves strongly, we wait for retracements, if the pullback
reaches 50% or 61 % levels, we need just a price action signal to
confirm our entry. See the example below:
By adding this technical trading tool to your strategy, you will be able
to identify potential trade set-ups in the market, if you analyzed the
chart above without using it, you wouldn’t know the reason why the
market dropped after the pullback.
Fibonacci tool can be used to trade the pin bar, the inside bar and the
engulfing bar setup as it was discussed in pervious sections.
The trade above is very profitable because there are lots of factors of
confluence that encourage us to place a sell order.
The first reason is the trend, it is obviously down, the second reason is
the key Fibonacci ratios that represent a resistance level, and the third
one is the inside bar false breakout.
One signal is not quite enough to make a good trading decision, you
have to look for multiple triggers that support your analysis, this way,
you will put the odds of success in your favor.
Look at another potential trade below:
As you can see, the price moved higher, pulled back to reach our key
ratios, and then continue higher. The formation of the inside bar false
breakout in this area indicates that the pullback has finished and
another strong move will take place.
Understanding the market structure is very important to know how to
use this strategy in your advantage, if the market is trending, you can
trade the inside bar false breakout as we discussed before.
But if the market is ranging, you have to change your tactic.
See the illustration below:
In the chart above, the market is trading between horizontal support
and resistance levels, as you see if you had entered as soon as the
market breaks out from the inside bar and the resistance level, you will
be caught in a false breakout.
The false breakout has formed because amateurs tried to predict the
breakout of the inside bar and the horizontal level early to pick the top,
but the market fake them out and formed a bull trap.
If you find this pattern in your chart, and you understand that buyers
were trapped by sellers, take this trade without hesitation, because it
is very profitable and it has a good risk/reward.
You place a selling order after the close of the break bar, and you set
your stop loss above it, your profit target is the next support level.
This strategy is not complicated, but it requires time and practice to
master it, bear in mind that a false breakout doesn’t happen every
time, and not all false breakouts are worth trading,
The benefits of trading the false breakout of the inside bar
candlestick pattern:
If you master trading this pattern, this will allow to stay away from
trapped traders and enter the market when novice traders have to get
out with a loss.
This strategy is not a holy grail, you have to be prepared to accept
some losing trades, but what is interesting about it, is that the risk
reward of this signal has a great potential, because when big
participants surprises amateurs and take their money, the market
moves very strongly, and if you can analyze correctly what happened
you will enter in the right time and make big profits. Imagine risking
say 50 points for 400 points profits.
Using this price action strategy will help you predict proper turning
points in the market in advance and understand how banks and
financial institutions trade the market.