Inside/Outside Bar Bar Strategy

JJJJ

I have been trialing both the inside and outside bar strategy and have some questions for anyone who is familiar with these strategies. For the Inside Bar approach, I identify stocks at today's close that are totally engulfed by the previous days candle. The previous day is called the "Mother Bar". Now, when the mother bar high is exceeded in tomorrows trading, that constitutes a buy signal. I have ..say a watch list of 20 stocks on alert to signal when the mother bar high is taken out. Some of these stocks will trigger the alert throughout the day..some early in the day and some later in the day.

1) My question is does the time of the day when these stocks are triggered indicate the potential strength of the move ? That is, is an early trigger in the morning more meaningful that a trigger later in the day ?
2) Second question is: anyone have feedback on what strategy : Inside Bar vrs Outside Bar is felt to be the most effective.

Thanks,
JJJJ

markd

Well, it's interesting to me that the major proponent of this theory (price action) doesn't present statistics on how often each kind of breakout occurs and the results of those breakouts (that I could find). Then you wouldn't have to ask which is most effective. It should be pretty easy to compile those statistics (you just need a programmer and data and an algorithm), so the fact that there don't seem to be any figures I take as a warning. Finding a lot of examples is NOT the same as finding EVERY example. Confirmation bias - looking for examples to confirm what we want to believe and ignoring or just not even seeing examples that don't confirm our beliefs - is real, especially in the markets. Many market "gurus" rely on it, wittingly or not.

That said, let's assume there is something to it. The market seems pretty random in the short term, but it's supposed to be fractal as well, meaning that rules that apply to the long term should also apply to the short term. So, it would seem wise to play breakouts in the direction of the current trend in the timeframe you want to trade. So, if you get an inside bar in an up leg in the five minute trend, you should probably take an upside breakout long (probably you should also take a downside breakout long after it fails (crosses back above the broken low), because the trend is up).

But, I would think you would also look for volume in the next lower time frame as confirmation. So, if you get a five minute inside bar in an up leg, you would watch the volume on the one minute bars as it approaches the mother bar high, and compare it to the volume for the one minute bars that made the mother bar high. The volume should be at least equal and preferably better on the approach, and surge on the cross above. If volume is not plainly enthusiastic, maybe pass on that one. If a trend is going to continue, higher prices should attract higher volume. If volume is lower, buyers are losing interest. Not an absolute rule, but probably the way to play it in the long run.

One more thing to consider is that inside and outside bars are an artifact of the timeframe you choose. For instance, an inside bar on a five minute chart would not appear on a 10 minute chart. Add to that, the choice of time frame is arbitrary - why a five minute chart and not 4 or 6 minutes? Daily and weekly charts have some non-arbitrary justification because trading stops at the end of the day or the week. They are clear psychological units. But there is really no good reason for choosing one length over another for intraday time frames. In fact, there have been proposals for units based on volume instead of time - but, too difficult to implement.