Swing High Inside Bar System
Here's a quick description of a swing high and an inside bar, for those of you unfamiliar.
A swing high is a candle with a lower high before it and a lower high after it.
Here's a random chart. Candle 2 is a swing high because the candle before that (1) has a lower high, and the candle after that (3) has a lower high.
Now let's look at inside bars.
An inside bar is formed when the range of the candle is within its preceding candle. In the picture above, the green candle is an inside bar.
Now let's look at a swing high inside bar. This is basically an inside bar that forms after a swing high. Using our pictures, if candle 3 in the first image was an inside bar, that is what I would call a swing high inside bar. Have a look:
Candle 2 is a swing high, and candle 3 is an inside bar. Is that simple enough to understand?
Now our setup is not to buy a breakout of a swing high inside bar (SHIB?). Rather, after a SHIB has been formed, we wait for a couple of candles to be formed whose low does
not breach the low of candle 2. Have a look at what I would consider a valid setup:
I'd posted this Cipla setup on my blog too. Candle 2 was a swing high as confirmed by the formation of candle 3 which had a lower high, and candle 3 was also an inside bar. Now for the next two candles, we do not want it to breach the low of candle 2. Candle 4 doesn't, neither does Candle 5. The setup is complete and we look to buy at a break of the high of candle 2.
It may seem complicated in a written form, but have a look at it on charts, it's quite simple and intuitive.
You'll notice that the Cipla trade above is about to hit the stop loss. I could have easily cherry picked a setup that worked, but by starting off with a losing trade I want to convey some relevant info about this setup. We'll most likely have a win rate of less than 50% with this setup, but because of decent risk reward opportunities and strong money management, we can have a positive expectancy. My next post is going to be about position sizing.
Don't just look at this as a setup to speculate. There are plenty of ways you can make use of it. For example, one way I've begun using it is to observe the names that show up in our screens everyday and form sectoral views. These views can be used to adjust your sectoral allocations in your long term portfolio. If one of our holdings' names show up in the screen, we can trade around a core position. There's so much you can do.
I've only recently begun testing this on Indian equities, I trade a similar variant of the setup on currencies too.
-Smeet