Inside Bar Candlestick
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The inside bar candlestick pattern doesn’t appear very often. So what’s the reason for this? Essentially, it has to do with the fact that this particular strategy depends on a strong, but not exhausted, trend.
It can be challenging to find an inside bar setup that provides a profit within a trending market since markets spend most of their time consolidating or ranging. Is there anything in the bar chart pattern that could interest you?
What is an inside bar?
This candle formation is famous for reversal/continuation candle formations since it requires only two candles to appear. Market sentiment plays a direct role in this pattern in anticipation of potential ‘big moves that may occur in the market. Inside bars indicate market indecision as prices are reluctant to move above/below the high/low of the preceding candle.
How to identify an inside bar on forex charts?
Here are the steps to identify an inside bar on a forex chart:
- By using price action and technical indicators, identify a previous trend
- Find the inside bar pattern in which the inside bar is fully engulfed by the high and low of the previous candlestick
How to use the inside bar to trade?
For trading with the inside bar, follow these steps:
1. Identify breakout potential as it develops
Inside bars generally indicate consolidation ahead of an upcoming breakout. To capitalise on the breakout potential, you need to determine if this breakout will lead to price appreciation or depreciation.
To determine the price trend up to that point, you can look at the past prices. Price movement that continues the trend before an inside bar setup is one of the essential characteristics of a profitable inside bar setup. A breakout is likely to continue a trend that has already begun before a period of consolidation shown by an inside bar.
Any given trade should also consider the risk/reward potential based on the trending price movement of the pair. It is generally essential to keep your risk to less than half your potential reward. Hence, it is only advantageous to use an inside bar setup when its trend, relationship to existing resistance lines and other chart indicators indicate strong breakout potential.
To evaluate this risk/reward ratio, you may wish to consider other technical indicators and chart patterns in your analysis to evaluate this risk/reward ratio. Many traders prefer to use other chart patterns and technical indicators to assess potential price movements.
However, some South African traders strongly advocate for inside bars as a reliable indicator. These other indicators could make the inside bar’s signals more credible.
It is important to remember that while inside bars can signal a potential buying opportunity, you will only be able to generate income if you can accurately evaluate these trades to determine what position you should initiate.
2. Tread lightly when trading inside bars under the daily chart
If you are looking at daily charts, you should pay attention to inside bars because they provide a more representative sample of price movement. On smaller time frames, such as one-hour and four-hour charts, inside bars are relatively common and not necessarily indicative of consolidation.
To take a position on short-term inside bars, you may need to back them up with solid chart patterns or other technical indicators indicating near-term movement. In contrast, your inside bar evidence won’t be as strong when examining narrower time frames, such as a daily chart.
3. Track consolidation from one day to the next
As a technical indicator, inside bars are most useful on daily charts. This is because inside bars indicate consolidation over a trading session, which means the shrinking range has been growing and will become more volatile shortly.
Consult the day bar trend and Fibonacci retracement, and other chart patterns and technical indicators to determine the direction in which the price might breakout.
Positions should open when a price breaks just above the upper level of the inside bar or when a price breaks within the range established by the inside bar. Waiting for the price action to move swiftly in one direction means you’ve already lost out on large amounts of potential profits.
It would have been a good idea to open a position when the price is still inside the range set by the inside bar.
Breakouts can still take several days despite consolidation occurring over several days on daily charts. A price inside a bar might predict price volatility, but it does not guarantee a fixed price movement.
Also, pay attention to the inside bar’s size of the mother bar. The smaller the inside bar relative to the previous bar, the more likely a breakout is just around the corner. But when the size difference is slight, the indicator is less powerful. You can use the proportions of this inside bar setup to determine trade potential as each day passes.
4. Always place a stop-loss order
Inside bars can indicate a price breakout, but traders cannot guarantee that the price will move in the direction they predicted. Therefore, a stop-loss order must enter whenever a trade depends on an inside bar indicating price consolidation.
Place your stop-loss order just below the bottom of the inside bar when buying. When a bullish inside bar appears, traders should expect some battles to go to the bears. You will be able to minimise those losses if you place stop-loss orders, preserving your profit if your prediction comes true.
Advantages and disadvantages of inside bar trading
Traders who use inside bar trading frequently follow price-action trading in their strategies. Even amateur traders can identify profitable trade opportunities using inside bar trading, among other price-action indicators, by opening positions based on breakout and momentum indicators.
Using inside bar trading to analyse trade opportunities can also be relatively simple. You only have to check charts once a day to find inside bar opportunities, as this approach works best on daily charts. Setting pending orders and checking trade potential can take just a few minutes every day for some traders.
However, inside bar trading is not perfect, as with all chart patterns. This indicator fails to perform well when applied to shorter time frames, making it less effective in day trading and intraday trading. The shorter the time frame, the more likely traders will see false positives when looking for breakout potential inside bars.
Although inside bars may indicate a breakout in price, there is no guarantee that it will happen.
Although the pairs usually trend upward in value, it shows multiple signs of a profitable setup. Anytime you trade on inside bars, you should be aware of the risk of price reversals. To build a sustainable trading strategy, stop-losses are vital.
Characteristics of the Inside bar setup pattern
Detailed below are six key characteristics of the Inside bar setup pattern:
1. Choosing the correct time frame
An essential characteristic of the inside bar is the time frame for setting it up. Generally, you should not use this strategy if the time frame is smaller than a daily chart. In the lower time frames, “noise” can impact the signals, resulting in false signals.
2. Works exceptionally well in trending market
An inside bar candlestick pattern is only helpful if you plan to trade based on a market trend. This strategy is useless in choppy or sideways markets because you will quickly lose your position.
Using an inside bar setup is only possible by trading with the trend. This pair had been in a strong uptrend going into both setups. Momentum like this is what you’re looking for when trading a strategy like this.
3. Inside bar set up on a pattern breakout
An inside bar setup usually appears after a breakout from a prior pattern. It is simple to understand why. Consolidation occurs when longs decide to take profits (sell) during a trend.
A market pullback causes new buyers to step up and purchase, which keeps prices elevated. Within days, weeks, or even months, the inside bar pattern continues until new buyers overpower sellers and drive the market higher.
4. Size of the mother candle and inside bar candle
It is essential to know how big the inside bar compares to the mother bar. As a general rule, the smaller the inside bar is than the mother bar, the more likely you are to experience a profitable trade setup.
In a perfect world, the inside bar should form within the upper or lower half of the mother bar.
5. Entering, exiting and stop-loss at inside bar trade
Entering: The low and high of an Inside Bar consolidation range should be marked when an inside candlestick chart pattern occurs. It is then possible to initiate a potential trade.
Inside candles provide insight into the eventual breakout and probability of a continuation outside the range in the direction of the break. Still, they do not provide information about the breakout direction before the actual move.
To put it simply, if the price action interrupts the range upward, you should go long. Conversely, it is advisable to trade the short side if the price action breaks the range downward.
6. Inside bar pattern helps in identifying changes in trends
Having an inside bar candlestick pattern is incredibly useful because it allows us to discover when the market isn’t as bullish or bearish as before.
Knowing when markets are expanding and contracting will improve your odds of finding a winning trade since we know expansions and contractions can only go on for a limited period.
A market’s movement can be explosive if either phase ends. Inside bar candlesticks indicate that the market is contracting and may be about to reverse its current trend.
7. The inside bar is a great tool
In forex and other assets, inside bars can be used to identify potential breakouts. In addition, some online trading platforms provide indicator tools to help identify inside bars on charts, making it easy to identify and take advantage of solid trade opportunities.
Inside bars are an easy indicator to identify, and they are a powerful data point for amateur and seasoned traders alike. If you want to evaluate different trading positions, use the inside bar as a starting point.
How reliable is the inside bar candle?
It is more challenging to trade this trading pattern when inside bars indicate continuation or reversal.
There is a possibility of false breakouts, which reduces the reliability of inside bars as a standalone pattern, which is why traders prefer to use inside bars as part of an overall forex trading strategy.
This means that the strategy serves as the foundation and the inside bar as more of a prompt.
- Is an inside day bullish or bearish?
The inside day candlestick pattern has both bullish and bearish characteristics.
- What does an inside day pattern indicate?
The candlestick pattern indicates an upward trend.
- How to identify an Inside bar candle?
The following characteristics identify this pattern:
Inside bar pattern occurs within the preceding bar’s trading range (or shadow). There is a minimum of two candles in the formation. The mother candlestick can be bullish (green) or bearish (red). The inside bar chart pattern can be either bullish or bearish.
Whether you trade the Forex market, equity market, commodity market or another market, inside bars are a sure-fire way to make money because it is a setup that it teaches in a price action course and one that has served very well in the past.
The setup doesn’t often happen, at least not under favourable circumstances. Because of this, I don’t recommend trading only the inside bar candlestick pattern.
As a result, you will likely start taking subpar setups since limiting your trade potential. Therefore, it is essential to consider inside bars as an addition to your trading toolbox rather than a separate tool.
Traders who pay attention to the six characteristics discussed above will consistently profit from the inside bar setup, but only if they pay attention to the six characteristics described above.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst