Trading Inside Bar False Breakouts with Fibonacci Retracements (2024)

The versatility of inside bar false breakouts, as detailed in “The Candlestick Trading Bible,” extends across multiple trading platforms and markets. In Forex trading, the strategy is particularly effective due to the frequent occurrence of inside bars in currency pair charts. Similarly, in crypto trading, where volatility and swift price movements are common, this approach can be used to identify potential reversals after sharp movements.

In the stock market, including major indices like the NASDAQ and S&P 500, traders can apply this strategy to identify key turning points, thereby optimizing entry and exit points. The underlying principle remains consistent across these markets: using inside bar false breakouts in conjunction with Fibonacci retracements to enhance the accuracy of trade setups.

Munehisa Homma, a legendary rice trader from the 18th century, is often credited with the early development of candlestick charting. Although he did not specifically comment on inside bar false breakouts, his principles about market psychology and price movement are highly relevant. Homma emphasized understanding the emotional state of the market, saying, “When all are bearish, there is cause for prices to rise.” This reflects the essence of the inside bar false breakout strategy, where a reversal after a false breakout can signal a strong move against the prevailing sentiment, catching the majority off-guard, in line with Homma’s observations on market behavior.

What is the inside bar false breakout strategy?

The inside bar false breakout, or Fakey pattern, occurs when price breaks out from an inside bar and then reversely sharply, indicating a potential reversal and providing a strategic entry point. The Inside Bar False Breakout Strategy, or the ‘Fakey’ pattern, is widely attributed to the renowned trader Nial Fuller, who popularized it as a key technique in price action trading.

This Forex Trading strategy, deeply rooted in understanding market psychology and price movements, revolves around the inside bar, a compact bar completely within the range of its preceding bar, indicative of market indecision. The turning point in this strategy is the false breakout, where the price momentarily breaks out of the inside bar’s range only to reverse sharply, often trapping traders who acted on the initial breakout.

The ‘Fakey’ pattern has shown remarkable effectiveness in various market conditions. Statistical analyses suggest that when this pattern forms in a strong trending market, its success rate in predicting reversals can be significantly high. For instance, in a study of Forex market patterns, it was found that the ‘Fakey’ pattern had a success rate of around 70% when combined with other confluence factors like key support and resistance levelsICT teaches about support and resistance levels in his mentorship program. He emphasizes that these levels are not just the... More. The strategy’s strength lies in its ability to capture a shift in market sentiment: a well-executed ‘Fakey’ setup can yield a risk-reward ratio of up to 1:3 or higher, depending on market volatility and the trader’s proficiency. This makes it an attractive strategy for traders looking to maximize gains while keeping risks in check.

Understanding Inside Bar False Breakouts:

The Concept of Inside Bar False Breakouts occur when the market appears to break out of an inside bar pattern but then sharply reverses direction. This phenomenon is a classic ‘trap’ scenario, where initial breakout signals mislead traders, only to reverse and move strongly in the opposite direction. This reversal often signals a significant and potent market move, as it catches many traders off guard.

For traders, inside bar false breakouts are critical because they represent a moment where market sentiment shifts dramatically. These setups are particularly effective in trending markets or at key support and resistance levels. Traders use these false breakouts to enter positions that are aligned with the new market momentum, often leading to high-probability trading opportunities with favorable risk-reward profiles.

Fibonacci Retracements as a Complementary Tool

Fibonacci retracements serve as a complementary tool in this trading strategy. When an inside bar false breakout aligns with a significant Fibonacci level, it adds an extra layer of confirmation to the potential reversal signal. For instance, if an inside bar false breakout occurs near the 61.8% Fibonacci retracementIt's based on the idea that markets will retrace a predictable portion of a move, before continuing in the original... More level, it could indicate a stronger likelihood of a market reversal.

This confluence of signals provides traders with a more robust framework for making informed decisions. By integrating these two concepts, traders can refine their analysis, leading to more precise and potentially profitable trades. The integration of pattern recognition with Fibonacci levels exemplifies the dynamic and adaptive nature of technical analysis in modern trading.

Identifying Key Fibonacci Levels:

Fibonacci retracements are a cornerstone tool in technical analysis, derived from the Fibonacci sequence, a series of numbers where each subsequent number is the sum of the previous two. In trading, these numbers are translated into percentage levels: 23.6%, 38.2%, 61.8%, and 100%.

These percentages represent potential retracement levels of a price movement, offering predictive support and resistance areas. Traders draw these levels by identifying significant high and low points on a chart and then applying these percentages to that vertical distance. The resulting horizontal lines indicate where the price might pause or reverse.

In practical terms, traders use these Fibonacci levels to anticipate where prices might find support or resistance after a significant move up or down. For instance, after a large rally or decline, traders look to these levels to determine potential areas where the market might retrace before continuing in the original direction. These levels are particularly useful in setting entry and exit points, as they often coincide with key market structures. The 61.8% level, often referred to as the “Golden Ratio,” is especially watched for its frequent occurrence in varying aspects of nature and financial markets.

Combining Inside Bars with Fibonacci in Trading:

The strategy of blending inside bar patterns with Fibonacci retracement levels forms a powerful synergy in trading. Whether in Forex, crypto markets, or stock trading, this combination elevates the effectiveness of both tools. The inside bar pattern, which signals a period of consolidation or hesitation in the market, gains additional significance when it aligns with key Fibonacci levels.

This alignment suggests that the consolidation is occurring at a potentially crucial juncture in price action. When an inside bar pattern forms near a key Fibonacci level, such as 38.2%, 61.8%, or even 100%, it commands more attention. Traders are on high alert for potential breakouts from these levels, as they often lead to significant price movements.

The occurrence of a false breakout from an inside bar at a Fibonacci level adds a layer of confluence to the trade signal. This confluence increases the reliability of a potential reversal signal. For example, if an inside bar false breakout occurs at a 61.8% Fibonacci retracement level, it can be seen as a strong indicator that the previous trend is exhausting and a reversal is imminent.

Traders can use this information to position themselves accordingly, either by entering new trades or adjusting existing ones. This strategy is particularly useful because it combines the predictability of Fibonacci levels with the volatility and momentum indicated by inside bar breakouts, offering a more comprehensive view of the market.

• An inside bar false breakout is a scenario where the price initially breaks out of the inside bar pattern but then reversely sharply, signaling a potential reversal.
• This phenomenon is particularly potent when aligned with key Fibonacci levels, providing a confluence of signals.
• Fibonacci retracements use horizontal lines to identify potential support or resistance levels at key Fibonacci ratios of 23.6%, 38.2%, 61.8%, and 100%.
• These levels are calculated by dividing the vertical distance between two significant price points by these ratios.
• The strategy involves seeking inside bar patterns near key Fibonacci levels in Forex trading, crypto trading, or the stock market.
• A false breakout from the inside bar that coincides with a Fibonacci level increases the credibility of the reversal signal.

Trading Inside Bar False Breakouts with Fibonacci Retracements Trade Setup:

• Entry Point: Enter the trade after the false breakout, as the price re-enters the range of the inside bar. Ideal entry points are just beyond the inside bar’s high or low.
• Stop Loss and Take Profit: Place the stop loss just outside the breakout’s extreme for tight risk control. Set take profit levels at subsequent Fibonacci levels or based on a pre-determined risk-reward ratio.
• Managing the Trade: Monitor the trade, especially the price action around subsequent Fibonacci levels. Traders might scale out of positions or move stop losses to break-evenBreak-even refers to a point in trading where the profit or loss of a trade is equal to the initial... More as the trade progresses.

How do you avoid false breakouts in trading?

To avoid false breakouts, one effective strategy is to wait for the price to close outside a trading range for two days or more, reducing the risk of entering during a deceptive market move.

How accurate is the inside bar trading strategy?

The inside bar strategy is most accurate when the inside bar forms within the upper or lower half of the mother bar, especially following a price breakout, signaling a likely trend reversal.

What causes false breakouts?

False breakouts often occur when the price repeatedly hits a support or resistance level but pulls back each time, creating a deceptive market signal.

These insights and strategies offer a comprehensive view of trading inside bar false breakouts with Fibonacci retracements, applicable in various trading environments.