These are two reasons why I’ve made inside bars my bread and butter.
Decreased price volatility means tighter initial stop loss.
Decreasing volatility usually ends up as range expansion meaning more profits.
Combining the two leads to impressive r multiples over time.
If you are as attuned to inside bars as me (it’s not difficult), then you’d notice different types of inside bar – some yielding better results than others.
The bedrock of my trading is the HIB. On a daily timeframe.
I don’t go short.
But let me introduce you to another inside bar of mine, with sometimes large profit potential.
The Pivot High Inside Bar
First off what’s a pivot high?
For those who don’t know, a pivot high is a multiple bar pattern, when the middle bar has a higher high than the bars immediately left and right.
There are three bar pivots, five bar pivots, and even longer than this.
If you plot horizontal support resistance lines, pivot highs are the price points used to connect them.
Strict three-bar pivot highs form short-term resistance lines.
Five bar pivot highs (or longer) form longer-term resistance lines.
Usually, I shun all but the most important S&R analysis.
But the importance of short-term pivot highs isn’t totally lost on me.
If breached within the time period of one bar, two max, they can lead to rapid price moves.
Combined with inside bars they can be quite stunning.
As can be seen below in the GBP/USD.
Pivot highs, TD trendlines, fractal patterns
Pivot highs, Tom Demark trendlines, or fractal patterns are all pretty much the same thing. Give or take the number of bars either side the middle bar.
Trading Chaos by Bill Williams uses ‘fractal’ patterns in a complete trading system – along with his Alligator oscillator chomping on prices and his Awesome oscillator
Worth a read. I learned a lot from that book. I traded fractals exclusively for a few years.
However, these days I rarely use fractals (or pivots) unless they contain an inside bar.
Here’s a chart of the USD/JPY using the Pivot High Inside Bar Breakout.
Pivot High Inside Bar trading rules
- The latest bar needs a lower high and higher low than the previous bar
- The previous bar must have a higher high than the bar before it
- Place a buy stop order two pips above the high of the highest bar
- Place a stop loss at the low of the latest bar
- If not triggered within one bar cancel the order
Here’s an example with US Oil.
The reason why you rarely see a trendline, indicator or support resistance level on my charts is not that I am some master trader.
I put it down to two things.
Firstly, I have a time limit on my trade signals. Read here.
By doing this it means there is momentum in most of my trades.
When you’re trading with momentum on your side, it’s easy to get to break even.
Secondly, I use tight stops. Not stupidly tight. Just tight enough to give the market room to dance around without being stopped out. The times I am stopped out, the short-term momentum has usually run its course anyway.
And I just wait for a new signal.
If you are new to my blog, here is a graphic of how I place first my stop loss. And then the trailing stop.
There is nothing complex about this, we simply trail the stop at the last closed low in an uptrend, and the last closed high in a downtrend.
I do this on all systems and timeframes I use. Be it, 8 hourly, daily or weekly.
When to use this pattern
Wouldn’t it be nice if all markets acted with the same personality? Unfortunately, they don’t.
Harami Inside Bars work across all markets with at least satisfactory results. That is why it’s my favourite.
But be picky when trading PHIBs
Major pairs will work. Major commodities will work. Ditto stock indices.
But I’d stay away from whippy forex crosses, or even less liquid commodities.
If you have access to 8-hour charts (not all charting packages do) I’ve found success using PHIB’s on GBP/USD, Oil and the USD/JPY.