This is a simple strategy that does not make use of any indicators, just price bars.
This strategy can be traded on any time frames and any currency pairs or even non currencies. I have success trading the Nikkei225 and other related stock index futures as well.
There are many definitions of what qualifies as a valid inside bar. To me, the entire inside bar, with its high and low should be inside the high and low of the previous bar. It does not matter what the open and close combinations are.
Once an inside bar is observed, set a limit order to long on a breakout 2 pips above the high of the inside bar or set a limit order to short on a breakout 2 pips below the low of the inside bar.
I would also use a EMA as a filter. For example, if an inside bar appeared on while price is trading below the EMA, I will only take shorts. Vice versa, if the inside bar appeared above the EMA, I will only take long breakouts.
Currency pairs I trade this on includes EUR/USD, GBP/USD and GBP/JPY. GBP pairs are especially suited for breakout strategies as they are sufficiently volatile.
Open GBP/USD chart and go to 1H timeframe.
Add 20 EMA.
Start to look out for inside bars on close. Alternatively, you can use the following indicators to help spot inside bars.
Initial stop loss will be on the other side of the inside bar. If the trade goes our way, a trailing stop is placed at the EMA.
If we are short, we will exit the trade when price closes ABOVE the EMA.
Alternatively, you can trail more aggressively by placing a stop above the highs of the previous 2 bars.
If we are long, we will exit the trade when price closes BELOW the EMA.
Or, you can trail aggressively by placing the stop loss below the lows of the previous 2 bars.
Our initial stops will often times be really small, sometimes even less than 10 pips on 1H timeframe. However, winning trades often generates profits of more than 2 times risk.
Example below shows GBP at 1H timeframe, and 3 trades would have been taken. The first inside bar has a high of 1.5389 and a low of 1.5371. Therefore, we will place a limit order to short at 2 pips below the low, which will be 1.5369. Likewise, the stop loss level will be at 2 pips above the high, at 1.5291.
The trade gained +99 pips on a stop loss of 22 pips, yielding a 4 times risk reward ratio. However, there were 2 losers during the same period that cost us -21 pips and -13 pips respectively.