Binary Option’s Mother Candle Strategy

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Binary Option’s Mother Candle Strategy

Another popular Binary Options trading strategy is the Mother Candle Strategy. It is a classic technique for trading, but it just has a brand new name. This strategy is popularly used by Forex traders but it can also be used by binary traders. What is it and how does it work?

The Mother Candle Strategy comes with an attack pattern as what candle chartists say because it has a twist in its inside bar. A simple candlestick analysis is what is relied upon by the strategy. It attempts to capture price breaks led by longer candle movements. It is proposed for multiple time frame usage but it is recommendable for intra-day short term trading.

Price action is the entire basis of this binary options strategy. It makes use of candlestick analysis for signaling and predicting trending asset entries. This is typically made for ten to sixty minute charts but it can be used for any time frame even though even though a ten minute and sixty minute is not recommendable. This is because of a higher market noise level as well as higher false signal chances. The entire system depends on a price/candle pattern that is popular on another name. The pattern comes to like when the prices trend and create a longer candle and then creates another small candle with a body that is inside of the other candle. This first candle created is known as the “mother” while the other one is called the “child.” Other chartists have other names for this based on the smaller candle’s in the shape, size, location, harami and attack pattern. The signal is provided during the mother candle’s body’s 1st close. With this, trades have to be taken to the close’s direction. On the first close out of the mother candles’ body, the signal is then given, and this is when trades have to be taken in the close’s direction. To filter false signals and probable bad trades, a twenty bar moving average as well as support and resistance is recommendable.

WHY IS THIS STRATEGY BAD?

Novice traders can’t exactly appreciate this strategy. It sucks mainly because it is an advance signal that may take years for you to master. When you take a signal off from its candlestick pattern, this signal can have a higher chance of failing especially when other factors are not considered. Resistance and support, market sentiment, and trend can greatly impact on the strategy. The strategy’s authors indicate that you have to use moving averages and resistance and support in order for bad trades to be filtered. The sad part is that the authors did not emphasize about how to use these moving averages. It is a sound strategy and one that can be quite difficult to analyze.

WHY IS THIS STRATEGY GOOD?

It does not completely suck because it is widely used, and many traders consider it useful. Chartists of Old School HLC price calls this pattern as inside bar. Candlestick enthusiasts call it Harami. This signal often leads price reversal and may happen at the primary movement’s bottom or top of a secondary correction of short, long, or near term of importance. This means that it can happen at any probable reversal point. This is why it is very powerful. You can identify a probably harami and a reversal can just be at the corner.

FINAL WORDS

Yes, it is an ideal strategy but it comes with a downside. Novice traders need not use it. There is basically nothing new about it and traders have long been trading using this technique. It has a very basic price action signal or candle stick. If you want to implement this, it can take years for you to perfect. You will have to use trend lines and resistance and support or Fibonacci. You may also have to use moving averages. This signal can be ideally used but it works best when you add an analysis tool to your current strategy.

The Inside Bar Strategy

Video Transcription:

Hello traders! Welcome to the Price Action Course and the sixth module, ‘Price Action Strategies.’ In this lesson, I’m going to teach you how to trade the inside candle strategy. The inside candle strategy is a continuation pattern that you’re going to find on very strong trends and sometimes on very strong moves you’re not going to be able to… well price is not going to make a correction deep enough for you to be able to get in on a very good risk-to-reward ratio scenario. But with this inside candle strategy, I’m going to teach you how to get in on this strong moves to the upside or the downside that doesn’t require too deep of a correction.

So let’s start by defining what the inside bar is. An inside candle is a formation, it’s a continuation pattern in which the second candle is completely contained within the range of the preceding bar called the mother bar. It really doesn’t matter if we have one bull and one bear candle and it really doesn’t matter if let’s say the closing of one bar is below the opening of the next one or if the opening of one bar is above the closing of the next one. What matters is that the second candle is contained completely inside the range of the first candle which is called the mother bar. The high of the mother bar has to be higher than the high of the second bar and the low of the mother bar has to be lower than the low of the second bar. And here’s and example, you can see that the first candle is a very strong bearish candle and the second candle is contained within the range of the mother bar. Here we have the high of the mother bar and here we have the low of the mother bar.

And you can see that the high of the second candle is well inside the range as well as the low of the candle. So we have here a inside candle or inside bar formation. And if we were on a down move, we will be looking to go short after the second candle closes and we have printed the inside bar formation. Now for the actual trade it’s quite simple actually and the risk that you are going to put on depends on length of the mother bar. But let’s start by how do we trade it. The way to trade it is to enter the breakout of the mother bar range. This means that in an uptrend we are going to go long when we break with the high of the mother bar and in a downtrend we are going to go short when we break with the low of the mother bar. And this means let’s say that we were here in a down move and we have this huge candle printing and then we print an inside bar, then this third bar closes below the low of the mother bar right there, we are going to go short for a continuation of the down move and the stops of course are always going to be in a down move at the high of the mother bar and in an up move and the low of the mother bar.

This means that if we were in an actual down move, we go short at the break of the mother bar low and our stops go above the high of the mother bar. And this is because if we break below but then price retraces and breaks with the mother bar high, our trade idea is invalidated and we must get out of the trade on a loss immediately. But this inside bar continuation pattern is not that frequent but it works very well and it has a very high win ratio. And of course it works better or the higher time frames like the four-hour chart or the daily chart because a daily inside candle is called an inside day, which is a very strong pattern for continuation of the overall structure of the market. Now we are going to go to a chart right now… I think we’re going to go to ES, which is the E-mini contract of the S&P 500 and we’re going to go through a couple of inside bar formations.

Okay traders, we’re back and as you can see we have the E-mini futures contract of the S&P 500. And we’re going to analyze the price action after these turn around or this roll over in the market. You can see that… let me just thicken this out for you so you can… because we are going to be just looking at single bars, we need our bars very thick. Okay, like this. So you can see that right here we break with the down structure and this is simple price action analysis just because… you don’t know what’s going to happen but here we break with the down structure so we are looking for opportunities to go long. Price breaks with the down structure and right here we have the first inside candle. You can see that, right here we have the high of the mother candle and right here we have the low of the mother candle.

Okay and this candle right here is inside of this range, which means that we have right here an inside candle and we must go long after the break of the mother bar’s high. This bar breaks with this range. Our stops go way below and because we are trading with a very specific price action strategy, we are always going to put our stops below the mother bar’s low. And in this case, we are going to be risking about $27 per contract on a long position. Now remember that we are just looking for inside candles. This means that I’m just showing you how to enter the market with an inside candle formation. Now it’s up to you to utilize everything you have learned on this price action course to make these trades work. Now, price starts to go up and as you can see we continue to go up. And right here… I don’t know if we have an inside candle, we don’t have an inside candle yet until we hit this high right here.

So we continue to the upside and of course you know that if you were long from the first setup on the E-mini S&P 500. At this inside bar, you should move your stops to the same levels of the stops of the second setup and lock in these 11 points. Now, price continues to the upside and we cannot find… well, the market doesn’t print another inside bar until we hit this small correction to the downside and you can see that the high of this candle is right here. Let me just make this line a little bigger. And the low of the candle is right here. And as you can see we have a… well, this very small bearish dodgy is the inside candle that we were looking for so we have our setup. Right now, we are just waiting for our break above the mother bar’s high for us to be able to go long on this setup. And this is a very clear example of why we always wait for the candles to close. You can see that this candle breaks with the mother candle’s high but fails to close above and closes below.

And this means that the market could actually be rejecting these areas and it’s going to roll over to the downside but right here you can see the price actually closes above and we put our stops right here. And if we’re long from these two positions, we’re going to move our stops to the same level of these stops which means that we are locking in already 55 points from the first setup and 23 points from the second setup, which means that overall we have made almost 80 points just by trading inside bars. And right now we are going to reach 24 points on this setup and as you can see price moves all the way up here. Well, you are price action traders. When you see the prices start to trade in a very narrow and very choppy range, you can close your positions for an overall profit of 139 points from the first position plus the 2nd and 3rd position. So this is how you trade the inside bar strategy and as you can see, this is a very good strategy when we don’t get deep enough corrections — in this case — to a downside because we are in an uptrend and whenever we spot an inside bar, we just wait for the break of the mother bar’s range.

More About Adam

Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

Inside Bar Trading Strategy

The Inside Bar Pattern (Break Out or Reversal Pattern)

An “inside bar” pattern is a two-bar price action trading strategy in which the inside bar is smaller and within the high to low range of the prior bar, i.e. the high is lower than the previous bar’s high, and the low is higher than the previous bar’s low. Its relative position can be at the top, the middle or the bottom of the prior bar.

The prior bar, the bar before the inside bar, is often referred to as the “mother bar”. You will sometimes see an inside bar referred to as an “ib” and its mother bar referred to as an “mb”.

Some traders use a more lenient definition of an inside bar that allows for the highs of the inside bar and the mother bar to be equal, or for the lows of both bars to be equal. However, if you have two bars with the same high and low, it’s generally not considered an inside bar by most traders.

Inside bars show a period of consolidation in a market. A daily chart inside bar will look like a ‘triangle’ on a 1 hour or 30 minute chart time frame. They often form following a strong move in a market, as it ‘pauses’ to consolidate before making its next move. However, they can also form at market turning points and act as reversal signals from key support or resistance levels.

How to Trade with Inside Bars

Inside bars can be traded in trending markets in the direction of the trend, when traded this way they are typically referred to as a ‘breakout play’ or an inside bar price action breakout pattern They can also be traded counter-trend, typically from key chart levels, when traded this way they are often referred to as inside bar reversals.

The classic entry for an inside bar signal is to place a buy stop or sell stop at the high or low of the mother bar, and then when price breakouts above or below the mother bar, your entry order is filled.

Stop loss placement is typically at the opposite end of the mother bar, or it can be placed near the mother bar halfway point (50% level), typically if the mother bar is larger than average.

It’s worth noting that these are the ‘classic’ or standard entry and stop loss placements for an inside bar setup, in the end, experienced traders may decide on other entries or stop loss placements as they see fit.

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Let’s take a look at some examples of trading with the inside bar strategy:

Trading Inside Bars in a Trending Market

In the example below, we can see what it looks like to trade an inside bar pattern in-line with a trending market. In this case, it was a down-trending market, so the inside bar pattern would be called an ‘inside bar sell signal’:

Here’s another example of trading an inside bar with a trending market. In this case, the market was trending higher, so the inside bars would be referred to as ‘inside bar buy signals’. Note, often in strong trends like the one in the example below, you will see multiple inside bar patterns forming, providing you with multiple high-probability entries into the trend:

Trading Inside Bars against the Trend, From Key Chart Levels

In the example below, we are looking at trading an inside bar pattern against the dominant daily chart trend. In this case, price had come back down to test a key support level , formed a pin bar reversal at that support, followed by an inside bar reversal. Note the strong push higher that unfolded following this inside bar setup.

Here’s another example of trading an inside bar against the recent trend / momentum and from a key chart level. In this case, we were trading an inside bar reversal signal from a key level of resistance. Also, note that the inside bar sell signal in the example below actually had two bars within the same mother bar, this is perfectly fine and is something you will see sometimes on the charts.

Trading inside bars from key levels of support or resistance can be very lucrative as they often lead to large moves in the opposite direction, as we can see in the chart below…

Tips on Trading the Inside Bar Pattern

  • As a beginning trader, it’s easiest to learn how to trade inside bars in-line with the dominant daily chart trend, or ‘in-line with the trend’. Inside bars at key levels as reversal plays are a bit trickier and take more time and experience to become proficient at.
  • Inside bars work best on the daily chart time frame, primarily because on lower time frames there are just too many inside bars and many of them are meaningless and lead to false breaks.
  • Inside bars can have multiple inside bars within the mother range, sometimes you’ll see 2, 3 or even 4 inside bars within the same mother bar structure, this is fine, it simply shows a longer period of consolidation, which often leads to a stronger breakout. You may see ‘coiling’ inside bars sometimes, these are inside bars with 2 or more inside bars within the same mother bar structure, each inside bar is smaller than the previous and within the high to low range of the previous bar.
  • Practice identifying inside bars on your charts before you try trading them live. Your first inside bar trade should be on the daily chart and in a trending market.
  • Inside bars sometimes form following pin bar patterns and they are also part of the fakey pattern (inside bar false-break pattern), so they are an important price action pattern to understand.
  • Inside bars typically offer good risk reward ratios because they often provide a tight stop loss placement and lead to a strong breakout as price breaks up or down from the pattern.

I hope you’ve enjoyed this inside bar pattern tutorial. For more information on trading inside bars and other price action patterns, click here.

Binary options candlestick strategy pdf

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Published on Nov 2, 2020

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