By Chris Blanchet
Many investors who are just learning technical analysis will make short-term investment decisions based on reliable, longer-term patterns such as the head and shoulders top discussed elsewhere in this series. The difficulty with such a strategy is that short-term trades based on long-term patterns will typically not yield the desired gains.
The inside bar pattern is one such pattern from which investors can take short-term cues. This pattern indicates a possible change in investor sentiment in the short-term. In other words, if the overall trend has been heading down, the inside bar often indicates a reversal in that trend.
Spotting an Inside BarInvestors who are just learning technical analysis might have a tough time identifying the inside bar. Explained (our website has a diagram), the inside bar pattern consists of a taller bar (wide trading range) followed by a shorter bar (tighter trading range). The shorter bar will fall within the same range as the preceding bar.
Confirm The Pattern
When it comes to using the inside bar to commit to a trade, investors should seek additional confirmation through additional analysis. This step is often overlooked when investors start learning technical analysis. Other analysis includes fundamental data for the security, sector and market, as well as technical data such as support and resistance levels and momentum.
When it comes to analyzing the inside bar pattern, investors will achieve better trading results from this pattern when the inbound trend is steeper. Additionally, investors will want the first bar to be longer, which suggests the inbound momentum has climaxed. As for the second bar, the narrower the better as this indicates that the reversal will be more dramatic.
Lastly, investors should notice that volume on the smaller bar is lighter. This suggests a more balanced trading activity.
When it comes to learning technical analysis, investors should remember that there are many other indicators that need to confirm their trade decisions. As well, there are plenty of specialized software programs available to make simple buy and sell recommendations. - 23309
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