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 previous posts.
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.
As you can see in the chart above, the market is trending down, so as a price action trader, i will try to follow the trend and look for powerful signals at the most powerful key levels.
The first signal we got is a pin bar that was rejected from a support level that becomes resistance.
The second factor that support our decision to sell the market is the rejection of the pin from the 50% Fibonacci retracement.
The third factor that encourages us to take this signal is the rejection of the pin bar from the 21 moving average that was acting as a dynamic resistance level.
The second signal was an engulfing bar candlestick pattern, as you can see in the chart, this candlestick pattern was formed at a resistance level in line with the direction of the market.
This is how you can trade trending markets using our price action signals. It’s simple just identify the trend, and the key levels, it can be a support or resistance level, a 21 moving averages, or 50% and 61% Fibonacci retracement.
Wait for a pin bar, an engulfing bar, an inside bar, or an inside bar false breakout to form near these levels in line with the direction of the market, and then execute your trade. It’s not complicated.
See another example below:
As you can see in the chart above the market is trading horizontally between the support and the resistance level.
This market is completely different from trending markets, and the strategy to trade it must different as well.
In ranging markets, we trade from the boundaries, I mean from support and resistance levels, don’t never try to trade inside the range.
In the chart above, we had two powerful signals, the first signal was a pin bar that was strongly rejected from the resistance level, and the second signal was an inside bar formed near the support level.
See another chart below:
As you can see in the chart above, there are three powerful pin bar signals. When the market approaches the 21 moving average that acts as a resistance level, sellers reject buyers, and form a pin bar that gives us a good entry point.