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.
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?
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.
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
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.
I would prefer to use the majority of candlestick patterns such as the Inside Bar Candlestick Pattern on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.
The Inside Bar Candlestick Pattern is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Inside Bar Candlestick Pattern into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Inside Bar Candlestick Pattern, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.