Inside Bar Pattern: What It Is & How to Use It For Trading

The strategy is useful when determining market strength and to capture a swing or ride a trend on the exit. The inside bar forex trading strategy is a ‘flashing light’, a major signal to the trader that reversal or continuation is about to occur. Its relative position can be at the top, the middle or the bottom of the prior bar. The critical point here is the third candlestick that rises above the second candle and indicates that the price is likely to increase. To confirm that, we used a basic moving average indicator, and, as seen in the chart, the crossover occurs precisely at the formation of the mother candle (the first candle).

Not a Strong Trend

The way that many traders use this type of Inside Bar is to enter on a break above or below the Inside Bar. As you probably know, when price action starts to consolidate, it usually means that there inside bar trading strategy will be a breakout. When the high of the previous bar (or candle) is higher than the current bar and the low of the previous bar is lower than the current bar, then current bar is an Inside Bar.

Inside Bar Pattern Strategies, Tips, and Techniques

If you are wondering what an inside bar is, then here’s an explanation.-the inside bar is a 2 candlestick… An inside bar is a classic bar candlestick pattern that occurs when a particular candle, known as the “inside bar,” is completely contained within the range of the previous candle, referred to as the “mother bar” or “mother Candle”. In other words, the inside bar’s high is lower than the mother candle’s high, and its low is higher than the mother candle’s low.

Professional Trader, Author & Coach

This pattern indicates a period of consolidation, where the market is being indecisive. As the balance between buyers and sellers is relatively equal price simply maintains a steady level. The inside bar is a two-candlestick pattern that signals trend continuation or reversal. The first candle of the pattern is usually large, called the mother candle, while the next candle is a small candle having low wicks, and is called the baby candle. In another case, when the mother bar does not appear, it’s also called the abandoned baby candle pattern. By doing so, traders can effectively use inside bars as a valuable component of their overall trading arsenal, helping them capitalize on various market situations and potentially improve their trading performance.

Now let’s analyze how traders can manage entries and exits while using this specific strategy. Enter Break of Engulfing Larger CandleInside Candle method is a great short term consolidation indicator.If… To start tracking Inside Bars on your charts, use one of our handy alert indicators. Stay tuned for future posts, where I share actual Inside Bar trading strategies and test each one to show you what works and what doesn’t.

Traders use the InSide Bars strategy by waiting for price to make a reversal move and then form an InSide Bar. This way they are able to control their positions based on specific criteria and manage the perfect entry point by waiting for an ideal reversal in the market. In addition, there would then be volatility contraction, allowing the buying pressure to potentially continue if the price were to break out higher. Again, learning to identify important support and resistance levels is all a matter of practice. Some traders like to use multiple moving averages to define a trend. They usually use 2-3 moving averages and when they are in order from shortest to longest period, that call that a valid trend.

  1. The pivotal moment happens with the emergence of the third candlestick of the Inside Bar chart pattern, surpassing the second candle and signalling a potential uptick in the price.
  2. You don’t need to know why Inside Bars happen, you just have to understand what the price action is telling you.
  3. To enhance your trading strategy, add a Relative Strength Index (RSI) indicator as a complementary tool to your Inside Bar analysis.
  4. The only thing that you have to take into account when identifying an Inside Bar is the high and the low of the previous bar.
  5. So, a better way to set your stop loss is 1 ATR below the low of the Inside Bar (for long trades) — so your trade has more “breathing room”.

It can be used given the right conditions to place potentially profitable trades by forecasting subsequent price action. For example, you may see the Inside Bar candle pattern develop, but it seems to be testing the range of resistance or support. This might mean that the pattern is just a correct not a signal for a profitable Inside Bar setup. In this scenario, you must have pinpointed the Inside Bar setup characterised by a notably large bullish candle succeeded by a smaller bearish candle, encapsulated by the first candlestick of the Inside Bar pattern. As mentioned above, when trading the Inside Bar chart pattern you need to look for the mother bar or candle, followed by the smaller candle, called the baby bar.

Furthermore, occasionally it may appear inside another chart pattern formation, such as the three inside-up patterns when the first two candles are in fact inside bars. The InSide Bar Strategy is a significant candlestick pattern that helps traders time entries with low risk. This strategy can be used to follow and trade with a trend or with reversals. An InSide Bar is a candle that is essentially “covered” by the previous candle. When you see this type of candle, it usually means that there has been reduced volatility within markets. The InSide Bars are not all equal in terms of size and range, and it is important to keep this in mind throughout your analysis.

The inside bar pattern should be considered a valuable tool in the world of price action trading, offering valuable insights into potential trading opportunities. Before we dig into the details of the inside bar pattern, it’s essential to have a clear understanding of what an inside bar is and how to identify it on a price chart. In this section, we will define the inside bar pattern and guide you through the process of spotting this unique formation in various markets. There’s good reason for this, and that reason is mainly because on time frames under the daily chart, inside bars simply grow too numerous to be worth trading. In the example below, we are looking at trading an inside bar pattern against the dominant daily chart trend.

One popular strategy is to buy the inside bar break and immediately set your stop. Next, assuming the price action continues as your thesis intended, move your stop to the high or low of the inside bar. This basic trade management strategy can prevent you from being trapped in an inside bar.

They often 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. The formation of the bearish break pattern follows the same process as the bullish breakout strategy.

As a general rule, my dear market interpreter, is that longer candles followed by shorter sticks essentially reveal market sentiment where buying and selling balance each other or the asset’s price is in consolidation. 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. As for stop loss, an order could be placed at the lowest price level of the mother candle or at the lowest level of the previous price swing (as shown in the chart). Finally, take profit is placed at the highest level of the last swing price.

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. The first candle has a tall body, sometimes very large wicks, and is called the mother bar. The second candle has a small body, sometimes having low wicks, and is called the baby candle. The inside bar formation is completed when the second candle closes within the body of the mother candle. I prefer smaller and “tighter” inside bars that don’t have really large mother bars…this shows more ‘compression’ and thus a stronger potential breakout from that compression. If you are a beginner or struggling trader, I suggest you avoid inside bars with big mother bars for now, see the previous example chart above for an example of an inside bar with a big mother bar.

Always remember; practice makes perfect and always test all new strategies and indicators on a free demo practice account before going live. Never risk any real money until you are 100% comfortable with new strategies or indicators you have just begun using. The second indicator shows you an image as a box of inside bars, or one inside bar and how it formed inside the previous bar.