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Trading with False Signals After Inside Bars

False signals after inside bars refer to conditions where there is a false breakout or failed penetration at the highest or lowest level of the mother bar, followed by a reversal in price movement. This article discusses these false signal patterns and how to trade them.

Bearish and Bullish False Signal Patterns:

  1. Two-Bar False Breakout:

    • Consists of the first bar breaking through the highest or lowest level of the mother bar, followed by the second bar moving in the opposite direction of the first bar.
    • Example: Bearish and bullish false breakouts.
  2. Pin Bar False Breakout:

    • Consists of a pin bar indicating a reversal in price movement after penetrating the highest or lowest level of the mother bar.
    • Example: Bearish reversal pin bar and bullish reversal pin bar.

Trading with False Signal Patterns:

  • False signal patterns resulting from false breakouts can occur in both trending and sideways markets, with a high probability of success.
  • Example in trending markets: A buy entry can be made after a false breakout at the support level, with a stop loss at the lowest level of the false breakout bar.
  • Example in sideways markets: A sell entry can be made after a false breakout at key resistance levels or after the lowest level of the mother bar is penetrated, with a stop loss at the highest level of the false breakout bar.
  • False signal patterns may not always consist of just one inside bar but can also consist of 2 or 3 inside bars or more.
  • Example of false signal pattern with 2 inside bars: A false breakout pin bar occurs after 2 inside bars, followed by a bullish bar. A buy entry can be made after the reversal pin bar.

False signals after inside bars are common patterns in the market and can provide attractive trading opportunities. With a good understanding of these patterns, traders can identify potential entry and exit opportunities. It's important to always consider other supporting factors and confirmatory signals as well as proper risk management in trading.

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