How to Trade the Inside Bar Pattern

Ideally, we want to see the inside bar form within the upper or lower half of the mother bar. It means always keeping your risk to no more than half the potential reward. So if your take profit is 200 pips, your stop loss can be no more than 100 pips away from your entry price. When viewed on smaller timeframes, inside bars (especially 2 or 3 bars) look like converging formations, often in the form of a triangle. When an inside bar appears on large timeframes (day, week), it is recommended to switch to lower periods and monitor the breakdown of the triangle (ascending or descending). The trendline and inside bar strategy is easy to spot and it has a high winning probability as compared to support/resistance.

A period of consolidation within a broader trend is the market’s way of regrouping. In an uptrend, the consolidation is triggered when longs decide to begin taking profits (selling). This causes the market to pullback, where new buyers step in and buy, which keeps prices elevated. This pattern continues for days, weeks or even months until new buyers are able to once again outweigh the sellers and drive the market higher. Notice how the second candle in the image above is completely engulfed, or contained, by the previous candle. In this case, the bearish candle (mother bar) represents a broader downtrend, while the bullish candle (inside bar) represents consolidation after the large decline.

We added the Relative Strength Index (RSI) indicator as our confluence trading tool to see if the price continues with the trend, reverses, or stays in range mode. Information available on this website is solely for educational purpose only. The advice, suggestion and guidance provided through the blogs are based on the research and personal views of the experts. Please do your own research before making your investment decision. Trading Fuel is our blogging website where we provide you with blogs related to technical analysis, share market, finance, and economics.

The only thing that matters is whether the mother bar is bullish or bearish. The formation of the mother bar, in combination with the trend, is what tells you which way to trade an inside bar setup. Notice how the bullish inside bar in the above illustration formed at the top of the mother bar’s range. This is the ideal scenario for trading https://forexhero.info/ a bullish inside bar setup as the market has gained a fresh set of buyers who are ready to push prices higher. Of course the opposite holds true for trading a bearish inside bar after a break of consolidation. The fakey trading pattern is very important in regards to inside bars because there is an inside bar pattern within a fakey.

The ensuing bullish pin bar represents the false break of the inside bar and the key support level. This aggressive push higher to hold support is what gives credence to the reversal pattern. An inside bar is generally considered to be a reversal pattern formed when the second bar or candlestick is engulfed within the previous bar or candlestick’s high and low. The inside bars are best identified using a bar chart, but a regular candlestick chart can also be used to identify these price patterns. We can notice that when an inside bar is formed; the following candles are usually extremely bullish or bearish. As the name implies, an inside bar forms inside of a large candle called a mother bar.

So, as you can assume, there’s no one version of the inside bar pattern. Notice how the pin bar failed to close within the range of the inside bar. This is considered a weak close as it signals that the bulls are not in full support of a move higher. The second image shows a pin bar that closed above the inside bar’s high. This is still a valid pattern because of the strong close by the bulls. So strong in fact that it formed a bullish engulfing pattern as a result.

If the trend continues, the trader increases his profit, and in case of a reversal, he takes the profit and prepares to enter a reversal. The inside bar is a figure of uncertainty, the participants are not sure about the further movement. The breakout of an extremum means determining the direction, so when the breakout is in the direction of movement, the price accelerates. But the breakout is not always true, there are false breakouts, the price consolidates near the inside bar. The trader always knows exactly where to place a reasonable stop (after the price is reached, holding the position loses its meaning) and limits losses in case of an erroneous entry. Sometimes, when support and resistance or trendline breaks with a big candlestick then price again come back inward the key level.

How to use the Inside Bar Candlestick Pattern?

When combined with other tools or indicators, trading with the inside bar provides an excellent and straightforward smart trade management strategy. Although it is not a decisive chart pattern like many other chart patterns, it certainly enables traders to find many trading opportunities. In this case, you will enter a trade intending to capture small price movements inside a range area, hence, support and resistance levels.

The inside bar strategy 2 is composed of a trendline breakout and an inside bar breakout. A trendline is made up of at least three consecutive bounces of the price that make it a key level. When the inside bar forms at that resistance level, it is a clear indication that the market is deciding its future direction. Breakout of the inside bar pattern confirms the direction of the market. If the price breaks high of the inside bar, then it will continue its trend (it will go up). Price will reverse its trend if it breaks the low of the inside bar.

Or, you can wait for the candle to close — but you risk missing a big move. Now, don’t worry about how to set your stop loss or trade management because we’ll cover that later. Now, you’ll learn how to use the Inside Bar strategy to catch the trend.

Previously, you’ve learned how Inside Bar allows you to catch reversals in the market. So, when you see multiple Inside Bars together, it’s a strong sign the market is about to make a big move soon. And volatility in the markets are always changing, it moves from a period of low volatility to high volatility (and inside bar trading strategy vice versa). See The Definitive Guide to Choosing a Stop Loss Strategy for more information on the topic. Inside bars can be very compatible when trading with channels such as envelopes, Bollinger bands, Keltner channels or Donchian channels. The illustration below shows the characteristics of an inside bar.

Breakout Trading

If the price range of the inside bar is less than 50% of the mother candle, this is an inside bar for a continuation of the trend. Reversal inside bars show the intention to go in the opposite direction more clearly. One of the next few candles, the reversal inside bar breaks in the direction opposite to the direction of the mother candle. Furthermore, occasionally it may appear inside another chart pattern formation, such as the three inside-up pattern when the first two candles are in fact inside bars.

This next one is a bit different from how we trade a typical pin bar setup. The difference here is that the close of the pin bar must be contained by the range of the inside bar. The only exception here is if you get a “strong” close whereby the pin bar engulfs the inside bar in a way that is favorable for the setup. To further explain the dynamics at work, let’s take a look at how and why this pattern forms.

The Inside Bar can be used in a reversal or trend-following trading strategies. However, it may not be sensible to rely too much on this pattern alone as it can give false signals. Instead, a more complete trading strategy is to use the Inside Bar with other technical indicators and good money management. Therefore, traders often trade the Inside Bar as a continuation pattern. For example, if you are looking to go long, identify the Inside Bar in a bullish market, exit the trade on high, and set a stop-loss close to a low of the bar.

Multiple Inside Bars

Still, the inside bar allows you to identify a pause in price action and a good market entry level before the next price movement. As discussed earlier, as long as the first candle covers the first candle, it is an inside bar pattern. Note how the price continues to trade higher after the appearance of the inside bar pattern and the confirmation of the third candlestick’s formation. Setting stop losses can also vary between aggressive versus conservative traders. Risk averse traders will usually prefer to place the stop loss beyond the high or low of the candlestick preceding the inside bar – that is, the candlestick that the inside bar is inside of.

By signing up as a member you acknowledge that we are not providing financial advice and that you are making the decision on the trades you place in the markets. We have no knowledge of the level of money you are trading with or the level of risk you are taking with each trade. So, you cannot trade every single inside bar the same, as you may not know if the trend will reverse or continue. Instead, it would be best to interpret the pattern differently on the market scenario and decide the next price direction.

The inside bar is the best candlestick pattern and I have used price action with the inside bar candlestick and made the best tradeable strategies. The inside day candle is one of the most popular chart patterns used by technical traders. Below are a few things to know before implementing this powerful tool into your trading strategy. The inside bar is a two candlestick reversal or continuation chart pattern showing a period of market consolidation. When the inside bar pattern develops at the end of a trend, it can signal a trend reversal. At the same time, if it develops in the middle of the trend, it can potentially signal a trend continuation.

• When talking about inside bars, traders prefer to mention the ‘break’ of the inside bar which is price moving either beyond the high or the low of the inside bar.
• The inside bar is further validated by a doji candlestick pattern, just a few candles ago and right near the upper end of the congestion zone.
• Furthermore, occasionally it may appear inside another chart pattern formation, such as the three inside-up pattern when the first two candles are in fact inside bars.
• The entire premise of this pattern relies on a key level of support or resistance.

If you have been trading for any length of time I’m sure you have heard this one many times. As common as this saying may be, it has never lost its significance in the financial markets, especially when it comes to trading inside bars. In this lesson, we’re going to discuss the five characteristics of a profitable inside bar setup. But before we do that, let’s first take a look at how an inside bar forms and what the pattern represents.

Below is a great example of a bullish inside bar that formed on the USDCAD daily time frame. This is actually a trade setup that was called here at Daily Price Action and has worked out beautifully thus far. In the chart below, we can see an example of a good inside bar reversal signal. Notice that the inside bar formed at a key chart level, indicating the market was hesitating and “unsure” if it wanted to move any higher.

Here are a few most frequently asked questions regarding the inside day candle. In the Inside Bar Candlestick Pattern, the second candle is smaller than the previous candle. It describes that the high of the second candle is lower than the first, and the low of the latter is higher than the first candle. To start tracking Inside Bars on your charts, use one of our handy alert indicators. Regardless of how you define a trend, spend a lot of time in Forex Tester or using screenshots to look at many different types of trends.

It is the most widely used candlestick pattern and there is a clear logic behind this pattern. It can make you a profitable trader if you will use it in the correct way. More often than not, when you have a false break of any kind, the market continues in the opposite direction.

• It also helps when the mother bar has the highest high or lowest low at the support/resistance level.
• In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading.
• An InSide Bar is a candle that is essentially “covered” by the previous candle.
• The caveat is that in order for the market to continue, it has to have room to run.
• The bull trend has been strong, and without bears closing consecutive bear bars, it’s hard for bears to swing short.

The inside bar, along with other Price Action patterns – pin bar, miraboso, trend lines and technical indicators is a powerful trading tool. When trading inside bars on a daily chart and refining the entry on m5-m15, a trader can make trades with a ratio of 1 to 5 or 1 to 10 or more. It is important to correctly interpret the inside bar and filter out false signals. The inside bar is only at first glance a simple figure to interpret. Well-executed inside bars don’t show up very often on the chart, so don’t look for them where they don’t exist.

This is to provide a meaningful buffer to a potential trade and avoid being ‘whipsawed’ out of the market through using a stop loss too tight and aggressive. When talking about inside bars, traders prefer to mention the ‘break’ of the inside bar which is price moving either beyond the high or the low of the inside bar. The inside bar pin bar combo can be a great addition to your trading arsenal. It’s very similar to the traditional pin bar strategy, only it comes with a second dimension that makes it even more reliable. By using the 50% entry strategy we were able to enter long with a 70 pip stop loss.

Learn the exact chart patterns you need to know to find opportunities in the markets. Generally, the longer the time frame, the better the signals the inside bar pattern provides. However, the pattern is certainly more suitable for short-term trading techniques. If you are a scalper, you can use the inside bar in a 15-minute timeframe or lower. Depending on what you are trading and what your end goals are, your exits will vary.