Trading strategy: 3-Bar Inside Bar Pattern

Description

An Inside bar is a type of bar (note: if you prefer candles, simply replace the word bar with candle in this text). Individual bars are of limited value to traders. Bar patterns –recurring combinations of bars– are much more interesting. In the well-known magazine 'Technical Analysis of Stocks & Commodities' (Vol. 29, March 2011) author Johnan Prathap discusses a bar pattern around an Inside bar. He also defines a trading strategy based on this pattern. The strategy is applied to crude oil, gold and silver.


  
Suitable for : Oil, gold and silver
Instruments : Futures and CFDs
Trading type : Swing trading
Trading tempo : 1 Signal every few weeks
The strategy : Video
Using NanoTrader Full : Manual or semi-automated

The strategy in detail

An Inside bar is simply a bar whose high and low are within the high and low of the preceding bar.

The 3-Bar Inside Bar pattern is a pattern consisting of three bars, including an Inside bar (hence the name 3-Bar Inside Bar). The following three criteria must be met for the pattern to occur:

   

1: the close of the first bar (B) in the pattern must be above the close of the previous bar (A)

2: the second bar (C) in the pattern must be an inside bar (see definition above)

3: the close of the third bar (D) in the pattern must be above the close of the previous bar (C)

Johnan Prathap applies the strategy on daily charts. Traders could, however, experiment with shorter timeframes such as 60 or 30 minutes. His instruments of choice are crude oil, gold and silver.

When to open a position?

As soon as the 3-Bar Inside Bar pattern is confirmed by the last bar (D) a position is opened at the market price at the next open.

When to close a position?

In his article in 'Technical Analysis of Stocks & Commodities' author Johnan Prathap proposes a stop and a target. Both are at 0,75% of the entry price.

 

This example shows a buy signal after a 3-Bar Inside pattern. The position is closed later the same day when the stop is hit.


 

This example shows a short sell signal after a 3-Bar Inside Bar pattern. The position is closed later the same day when the profit target is reached.


Attention: A fixed value, 0,75%, for the distance of the stop and the profit target is a rigid way of working. It does not take into account the difference in volatility between gold, oil and, silver. One alternative would be to use a stop and a target based on the ATR (Average True Range). Another alternative would be a trailing stop based on the ATR. It is easy to change this in NanoTrader Full. You can immediately see the impact on the profit of any changes you make.

Attention
: Johnan Prathap only closes a position on the basis of the stop or a profit target. He does not close a position when the opposite signal occurs. Many strategies also close positions when the opposite signal occurs. If you prefer this simply click the box "Metasentimentor can close position" in the Designer Dialog screen.

   

 

Conclusion

The 3-Bar Inside Bar strategy is a pattern strategy. The strategy and the pattern on which it is based was developed by Johnan Prathap in an article in the respected 'Technical Analysis of Stocks & Commodities' magazine. The strategy is used to trade oil, gold and silver on the basis of day charts. Traders could experiment with shorter timeframes, other financial instruments and, other stop orders.

Practical implementation

In NanoTrader Full follow these steps:
  • Choose the instrument you wish to trade.

  • Open a chart with the template study "WHS 3 Bar Inside Bar".

  • Semi-automated trading? Simply activate the TradeGuard+AutoOrder or the AutoOrder function.