The Inside Bar is a two candles pattern representing price continuation/reversal. Its formation takes place when the second candle is inside the preceding candle, hence the name inside bar. The inside bar is a popular reversal/continuation candle formation that only requires two candles to present itself. This pattern is a direct play on short-term market sentiment looking to enter before the ‘big moves’ that may take place in the market.
What is the Inside Bar Candlestick Pattern?
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.
The first candle is also known as a mother bar, and the second is called the baby bar.
The inside bar is usually a continuation pattern. This means that after the emergence of the Inside Bar, the price may continue to move in the same direction as before.
Sometimes the Inside Bar occurs when there is pressure from sellers and buyers. This shows indecision in the market as both of them were unable to push the price higher or lower. Usually, the presence of the Doji candlestick pattern before the Inside Bar confirms this uncertainty.
Here’s what the Inside Bar Candlestick Pattern looks like on a chart:
The Inside Bar can have several inside bars within its range. This defines a more extended consolidation period that can possibly lead to a stronger breakout.
The Inside Bar is a typical pattern and can frequently appear on the forex charts.
How to use the Inside Bar Candlestick Pattern?
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.
It is essential to remember that the appearance of the Inside Bar often signifies a serious price move. As you can see in the chart above, there was an extreme market sentiment right after the Inside Bar emergence.
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. Conversely, when going short, find the Inside Bar in a bearish trend, exit the trade on low, and place a stop-loss near the high of Inside Bar.
Trading like this seems simple, but it isn’t. Like any other candlestick pattern, the Inside Bar doesn’t give an exact entry and exit points. So, they should be used in combination with other indicators like moving averages.
You can notice on the chart below that right after the Inside Bar entrance; the Moving Averages are below the 0 level. So, this may be a chance to consider going short.
You can spot these candlestick patterns on long and short term timeframes. They can appear on forex currency pairs, stocks, indices, cryptocurrencies, commodities, metals, energies, gold, silver and more.
Inside Bar Candlestick Pattern trading strategy
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.
Some traders use a more lenient definition of an inside bar that allows for the highs of the inside bar and the mother bar to be equal, or for the lows of both bars to be equal. However, if you have two bars with the same high and low, it’s generally not considered an inside bar by some forex traders.
Inside bars show a period of consolidation in a market. A daily chart inside bar will look like a ‘triangle’ on a 1 hour or 30 minute chart time frame. They can sometimes form following a strong move in a market, as it ‘pauses’ to consolidate before making its next move. However, they can also form at market turning points and act as reversal signals from key support or resistance levels.
Inside Bar Candlestick Pattern buy strategy
- Locate the Inside Bar in an uptrend.
- Wait for the price bar to go bullish before entry.
- Set a stop-loss near the recent low from the Inside Bar.
- Exit the trade when the price is at the high level.
Inside Bar Candlestick Pattern sell strategy
- Look for the Inside Bar in a downtrend.
- Wait for the price bar to go bearish before entry.
- Set a stop-loss near the recent high from the Inside Bar.
- Exit the trade when the price is at the low level.
Inside Bar Candlestick Pattern conclusion
An “inside bar” pattern is a two-bar price action trading strategy in which the inside bar is smaller and within the high to low range of the prior bar, i.e. the high is lower than the previous bar’s high, and the low is higher than the previous bar’s low.
As the Inside Bar has two candles, they can sometimes be more effective than a single candlestick pattern. They can help you identify price continuation/reversal. But as we already mentioned, the best use of the Inside Bar is with other technical analysis and not on its own.
The Inside Bar Candlestick Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
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