Other traders may use a trailing stop instead of waiting for some time (with no guarantee of a favourable outcome) for the market to reach the key level. This approach is designed to help you lock in profits more consistently at predetermined increments. Still, some skilled traders can also trade the inside bar during a ranging market, provided there is enough confluence (leading us to the next part of an ideal setup). Psychologically, the inside bar comes after a phase of market consolidation where neither buyers, nor sellers dominate. This indecision may be due to a pending news event, accumulation of orders by institutional traders (or ‘smart money’) or simply profit-taking. 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.

The Bullish Harami Pattern: Definition and Trading Example

To spot a valid inside bar, check if the candle is fully within the range of the previous one. Make sure the pattern is not too small compared to the previous candles. This strategy uses inside bars to spot when a trend might keep going. It simply represents a period of consolidation or market indecision. Thus, a formation in an uptrend can be bullish and signal a continuation of the trend, or bearish and signal a trend reversal. The same concept applies to a downtrend, where the indicator may be bearish and the trend will continue, or bullish and the trend will reverse.

The $2131 level was the obvious key support in this instance. So, you would have considered taking profits around this area. We also recommend using the Fibonacci retracement tool to manually lock in your gains as the market moves in your direction. So, you have determined how you’ll enter and exit the inside bar pattern.

Only the breakout of the inside bar decides the direction of the market. The inside bar breakout means the break of high or low of inside bar candlestick. This setup increases the probability of reversal in trend after inside bar breakout. Because moving average breakout already indicates a reversal in the trend of a specific currency pair. Now if an inside bar forms just after the MA breakout, then it indicates the decision zone. Price is deciding either to reverse the trend completely or come back inside the MA to continue its previous trend.

It hardly appears in perfect form (patience is key), particularly as one goes higher in time frame. Even so, once it forms, confluence and strategic execution greatly influence your success. We should also speak about the ‘outside bar,’ which is the opposite of the inside bar. Like the inside bar, this engulfing pattern is used for trading breakouts in mostly trending markets. The outside bar also has the same formation – a mother bar being larger than a smaller one. This formation comprises a small green-coloured candlestick (inside bar) left next to the range or body of a larger red-coloured candlestick (mother bar).

Reversal Signal

Technically, as long as the first candle covers the second candle, then it’s an inside bar pattern. It is regularly utilised on inside bars with bigger mother bars. That is, to say, a golden middle between the high and low of the mother bar. The classic and most widely utilised stop-loss arrangement will be precisely above or below the mother bar high or low. The typical action is to go with 1 pip over or below the mother bar high or low. There is no necessity in trying and figuring out the best distance above, or vice versa below the preceding bar – the trade either performs well, or it doesn’t.

A stop-loss order might be placed below the low of the pattern in a long trade and above the high of the pattern in a short trade. Profit targets can be determined based on the trader’s trading plan, technical indicators, or key support and resistance levels. The meaning of an inside bar candle pattern that is bullish refers to the pattern, after which the price moves upwards.

Adaptive moving average: how to adapt and overcome markets’ changes

Eventually, the pair dropped as it broke out of the triangle, which stemmed from the pattern. 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.

How May You Confirm an Inside Bar Signal?

• Big institutions and big traders are deciding either to upward or downward.
• The stronger the trend, the easier it is for the pattern to provide a reliable signal.
• A newsletter built for market enthusiasts by market enthusiasts.
• Together, they form essential components of a trader’s toolkit, enabling informed decisions in diverse market conditions.

The daily timeframe is the best to trade inside bar patterns. However, you can trade the inside bar on 30M or any timeframe above 30M. To make a trading strategy, first, understand the logic behind price action. If you do this, you will capture the best trades automatically by a single chart view.

• The size of the inside bar candles can also provide valuable insights to a forex trader.
• Following the inside bar trading strategy, the trader waits for the breakout above the setup marked by a horizontal line.
• In a nutshell, here are the main takeaways from identifying and trading the inside bar chart pattern.
• Traders typically combine the formation with technical indicators and utilise risk management tools to build a solid trading strategy.

The first candle is called the mother bar, while the second candle is also called the baby candle. In another case, when the mother bar does not appear, it’s also called the abandoned baby candle pattern. The inside bar candle pattern is one of the most frequently occurring chart patterns in financial markets. It is called an inside bar because the first candle completely covers the second candle, which is a chart formation that helps traders predict the next price movement. 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.

How to Identify Inside Bar Setups

Inside Bar and Outside Bar patterns are highly versatile tools in price action trading, offering traders clear signals to navigate market trends and potential reversals. Their effectiveness lies in their ability to capture key market movements while remaining adaptable across different timeframes and trading scenarios. Below are the key qualities that make these patterns essential for any trading strategy. It is not inherently a signal of trend reversal but rather an indication that the market is pausing, which could lead to either a continuation or reversal of the previous trend.

While their prolific writing career includes seven books and contributions to numerous financial websites and newswires, much of their recent work was published at Benzinga. The visual representation of this two-candle pattern resembles a smaller candle inside a larger candle. Check out the diagram below for an example of what an inside bar pattern looks like. Good risk management includes setting the right stop losses and choosing the right position sizes.

It hints at a reversal (in a downtrend) or continuation (in an uptrend). 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.

As the Inside Bar has two candles, they can sometimes be more effective than a single candlestick pattern. But as we already mentioned, the best use of the Inside Bar is with other technical analysis and not on its own. A daily chart inside bar will look like a ‘triangle’ on a 1 hour or 30 minute chart time inside bar forex frame. They can sometimes form following a strong move in a market, as it ‘pauses’ to consolidate before making its next move.

Still, we go beyond by providing you with other vital components to ultimately be successful. There are many breakout-based alternatives to inside bars, including the ‘fakey’ and triangle patterns. Above is an example of a downtrend on the daily chart of Ethereum.

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. A common question is understanding the differences between Inside Bar and Engulfing Bar patterns, as both involve two candles. A Double Inside Bar occurs when two consecutive Inside Bars form within the range of a single Mother Bar. This signals even stronger consolidation, meaning that when a breakout finally happens, it could be more powerful.

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. No pattern is the holy grail of trading, and the inside bar pattern, like many other classical chart patterns, has strengths and weaknesses. The inside bar pattern also gives great breakout trading opportunities, and it’s very simple to trade. For instance, if you are aiming to purchase, you should place a purchase on the stop entry only above the mother bar high. Conversely, if you are aiming to sell, you should place a sell on the stop entry precisely below the mother bar low.