The inside bar pattern features two successive candlesticks that typically indicate a market consolidation or uncertainty phase. Recognising this setup can benefit traders and analysts, as it offers clues about possible future price trends. In this article, we will examine various instances of this pattern on price charts and delve into how to interpret its signals for trading strategies.
What is the Inside Bar in Trading Pattern?
An inside bar is a candlestick pattern where the high and low of a candlestick are within the high and low range of the preceding candlestick. This means that the entire price movement of one candle is confined within the price range of the previous candle.
This formation indicates a period of market consolidation or indecision but does not necessarily signal a trend reversal. The price might continue its current trend or reverse direction. This pattern can appear in both uptrends and downtrends, signifying that the trading range of the current candle is narrower than that of the preceding candle. This reduction in price volatility suggests a temporary balance between buyers and sellers.
The inside bar pattern can be found in various financial instruments, including stocks, cryptocurrencies, ETFs, indices, and forex currency pairs, and can be traded using contracts for difference (CFDs).
Identifying Inside Bar Trading Strategy
To identify this pattern on trading charts, traders typically follow these steps:
1. Identify two candlesticks: Begin by locating a candlestick with distinct high and low ranges, followed by the next candlestick.
2. Compare the high and low ranges: Ensure that the high and low range of the subsequent candle is entirely within the high and low range of the preceding candlestick. The price movement of the second candle should be confined within the boundaries of the first candle.
3. Confirmation: After verifying that the second candle meets these criteria, traders can confirm it as an inside bar.
How to Trade Inside Bar?
Inside bars can be traded in trending markets in the direction of the prevailing trend, often referred to as a ‘breakout play’ or an inside bar price action breakout pattern. They can also be traded counter-trends, usually from key chart levels, where they are known as inside bar reversals.
The traditional entry method for an inside bar setup involves placing a buy-stop or sell-stop order at the high or low of the mother bar. When the price breaks above or below the mother bar, the entry order is triggered.
Stop loss placement is typically at the opposite end of the mother bar or near the halfway point (50% level) of the mother bar, especially if the mother bar is larger than average.
It’s important to note that these are the ‘classic’ or standard entry and stop loss placements for an inside bar setup. Experienced traders might choose different entry points or stop loss placements based on their strategies and preferences.
Now, let’s explore some examples of trading using the inside bar strategy:
Trading Inside Bars in a Trending Market
In the example below, we illustrate trading an inside bar pattern in alignment with a trending market. Here, the market was in a downtrend, so the inside bar pattern is referred to as an ‘inside bar sell signal’:
Here’s another example of trading an inside bar in a trending market. In this instance, the market was trending upwards, making the inside bars ‘inside bar buy signals.’ Note that in strong trends like the one shown below, you will often see multiple inside bar patterns forming, offering multiple high-probability entry points into the trend:
Trading Inside Bars Against the Trend, From Key Chart Levels
In the example below, we examine trading an inside bar pattern against the dominant daily chart trend. Here, the price retraced to test a key support level, forming a pin bar reversal at that support, followed by an inside bar reversal. Observe the strong upward movement that followed this inside bar setup.
Tips on Trading the Inside Bar Pattern
- Start with the Daily Chart Trend: As a beginner, it’s easier to trade inside bars in line with the dominant daily chart trend. Inside bars at key levels as reversal plays are more complex and require more experience to master.
- Focus on the Daily Time Frame: Inside bars are most effective on the daily chart time frame. On lower time frames, the abundance of inside bars can be overwhelming and often lead to false breaks.
- Multiple Inside Bars: Inside bars can contain multiple inside bars within the mother bar range. It’s not uncommon to see 2, 3, or even 4 inside bars within the same structure. This indicates a longer period of consolidation, which can often lead to a stronger breakout. ‘Coiling’ inside bars, where each subsequent inside bar is smaller than the previous one within the same mother bar range, are also noteworthy.
- Practice Before Trading Live: Practice identifying inside bars on your charts before trading them live. Your first inside bar trade should ideally be on the daily chart and in a trending market.
- Complementary Patterns: Inside bars often form following pin bar patterns and are part of the fakey pattern (inside bar false-break pattern). Understanding these patterns is crucial as they play a significant role in price action trading.
- Good Risk-Reward Ratios: Inside bars typically offer good risk-reward ratios due to their potential for tight stop-loss placements and the likelihood of strong breakouts as the price moves out of the pattern.
Top Characteristics of an Inside Bar Strategy
Time Frame
The Inside Bar pattern is most effective on a daily time frame. Shorter time frames tend to produce inaccurate signals due to market noise, causing the pattern to appear multiple times without providing reliable market indications. Conversely, longer time frames might be too extended, reducing the effectiveness of the Inside Bar pattern in signalling ideal market continuation or reversals.
Trending Market
The Inside Bar pattern is most reliable in a trending market. The stronger the trend, the more dependable the signal. In a market lacking a clear trend, the Inside Bar pattern is less likely to form due to uncertain price movements.
Size
The accuracy of the Inside Bar pattern is influenced by the size of the Inside Bar relative to the Mother Bar. A smaller Inside Bar within the range of the Mother Bar generally indicates a higher probability of an accurate signal. Ideally, the Inside Bar should form within the upper or lower half of the Mother Bar.
Breakouts
An Inside Bar pattern following a price breakout in the current trend provides the most reliable signals. This formation suggests the potential end of the current trend and a forthcoming market reversal. This setup allows traders to place short orders during an uptrend and long orders during a downtrend.
Conclusion
While the setup can be a valuable tool for identifying potential breakout or continuation opportunities, traders mustn’t depend solely on this pattern for their trading decisions.
To strengthen their analysis, traders should combine the Inside Bar formation with other technical indicators and implement effective risk management strategies to mitigate potential losses. You should learn about the advantages of forex trading to be a profitable trader.