Are you a technical trader? In this article, you will learn a result-oriented candlestick pattern trading method known as the inside bar trading strategy.
If you apply technical analysis, then most of the charts are made up of candlestick charts. Though technical indicators are applied extensively, candlestick patterns play a vital role in providing successful trading signals. In other words, you will see significant trading results if you combine technical indicators with candlestick patterns.
Most forex traders look continuously for profitable day trading or swing trading strategies. However, they fail to specialise in understanding a trading strategy thoroughly. They move from one trading system to another in the quest to find a better trading system.
The most significant factor of this inside bar trading strategy is the small stop loss. It has low risk and a high reward. In this article, we will discuss the identification of the inside bar pattern. And also understand the entry and exit methods specifically.
What are the components of the Inside Bar Pattern?
The inside bar candlestick pattern is a two-candle pattern. It consists of a first candle, which engulfs the second candle. The opening price of the first candlestick is higher than the second candlestick. Similarly, the closing price of the first candle is lower than the second candle.
The first candle is also known as the “Mother candle. In simple terms, the mother candlestick engulfs the second candlestick completely.
A bullish inside bar pattern forms when the first candle is a bearish candle and the second candle is bullish. Similarly, in a bearish inside bar candlestick pattern, the first candle is bullish while the second candle is bearish.
The important criteria of this pattern are the opening and closing prices of the first candle, known as the preceding candle or mother candle. As a deciding factor, the first candle must completely engulf the second candle.
How To Identify The Inside Bar Candlestick Pattern?
Identification of this candle pattern is pretty simple and easy. If you understand the bullish and bearish engulfing candle patterns, then you can spot them right away. Visually, the body of both candles helps you identify the pattern.
In fact, even if the engulfing is very small, you should consider the pattern. It is not necessary for the second candle to be engulfed by a comparatively larger mother candle. All that matters is that you were able to visually confirm the engulfing.
Also, the pattern is the opposite of the outside bar candlestick pattern.
How to trade the Inside Bar candle Pattern?
You can spot the inside bar pattern in uptrend and downtrend market conditions. Similarly, the pattern occurs as a reversal pattern and a continuation pattern. However, you can get significant results if you trade as a continuation pattern.
Trading the Reversal Pattern
The GBPUSD H4 price chart above shows the inside bar candlestick reversal pattern. The price was moving in a downtrend and you can spot two consecutive candles. Here, the first candle engulfs the second candle completely. Since the second candle is bullish, it suggests a potential price reversal.
Candlestick charts reflect the underlying price action in the market. The second candle shows potential consolidation of the price. In other words, it shows the shift in the market, which can be due to various reasons.
However, the most important thing you should note is the price consolidation. So, forex traders should prepare for price movement after the consolidation.
In the above example, after the closing of the second candle, you could validate the presence of the inside bar candlestick pattern. Once the pattern was validated, the price indeed reversed its direction and moved upwards.
Similarly, such a pattern can be found during an opposite market condition. In that case, you can look for a potential bearish reversal signal and validate the pattern and trade accordingly.
Such as, during an uptrend, if you identify a bearish mother candle and a bullish second candle. The mother candle should engulf the second candle to validate the inside bar pattern. From here, you can look for a potential bearish reversal trading opportunity using this pattern.
Trading Inside the Bar Continuation Pattern
In the above GBPUSD H4, the market is already in an existing uptrend with higher highs and lower lows. You can easily identify the 2 candle inside bar trading pattern during the uptrend. So, the consolidation could potentially be due to the pause in the current uptrend.
Once the consolidation is over, you can expect the prices to continue in the trend’s direction. So, forex technical traders should adopt a trading strategy accordingly. A similar setup could be formed in an existing downtrend, which you can interpret accordingly.
Entry And Exit Of The Inside Bar Trading Strategy
The above GBPUSD H4 candlestick price chart shows the entry and exit method you could follow for the inside bar candle trading strategy.
As mentioned earlier, this candle pattern has a very low risk. Since the entry and stop loss are based on the high and low of the second candle, the stop loss is very minimal. This results in a trade with a very good risk-reward ratio.
As the trades result in a good risk-reward ratio, trading losses due to false signals are lower. The reward significantly offsets the risk and enhances the end result in this trading strategy.
During a bullish inside bar candle pattern, the entry is above the high of the second candle. You can place the stop loss below the second candle’s low.
Similarly, during a bearish inside bar trading strategy, the entry point is at the low of the second candle. A stop loss above the second candle’s high is optimal.
A word of caution: most traders rush into the marker before the closing of the second candle. Sometimes, the second candle may stretch a bit longer and invalidate the pattern during its closing. So, traders should wait for the closing of the second candle to validate the inside bar candle pattern.
The Inside Bar Trading Strategy Guide
The inside bar is a simple but powerful candlestick pattern.
It can help you better time your entries with low risk.
The best part?
You can use it to trade with the trend or for market reversals.
What is an Inside Bar and how does it work?
An Inside Bar is a candle that’s “covered” by the prior candle.
Here’s what I mean…
Now when you see an Inside Bar candle, it means there’s reduced volatility in the markets.
However, not all Inside Bars are created equal.
1. Inside Bar with a small range
This is a standard Inside Bar candle where the range of the candle is small, and it’s “covered” by the prior candle.
This tells you there are indecision and low volatility in the markets.
(Note: This will be the focus of our article.)
2. Inside bar with a wide selection
You can also have an Inside Bar candle with a large range.
This is still an inside bar as the range of the candles is “covered” by the prior candle.
But, you’ll notice the range of the inside bar is large too.
Depending on the close of the Inside Bar, this could represent indecision or a reversal in the markets.
Here’s what I mean:
large inside bar with a bullish close showing signs of strength.
large inside bar with a small body showing signs of indecision:
Multiple Inside Bars
And finally, you can have multiple inside bars together.
This is a powerful pattern because it tells you there’s low volatility in the markets.
And volatility in the markets is always changing; it moves from a period of low volatility to a period of high volatility (and vice versa).
So, when you see multiple inside bars together, it’s a strong sign the market is about to make a big move soon.
Here’s what it looks like…
Don’t make this common mistake when trading the Inside Bar…
Many traders would spot an inside bar and they’d trade the breakout of it.
That’s not smart because it’s a low probability trade, especially when the market is in a “choppy” range.
So, how should you trade an inside bar?
Well, that’s what you’ll discover next.
Catch the reversal with an inside bar trading strategy.
Here’s the thing:
Many traders love to trade inside bars in market structures (like support and resistance).
The price approaches resistance and it forms an inside bar.
Then, traders would look to go short on the break of the inside bar.
Personally, I don’t like this approach because it’s prone to a fake out.
Instead, for my Inside Bar strategy, I prefer for the price to make the reversal move first and then form an Inside Bar.
This tells me two things:
- The buyers are in control as they managed to make the “first wave” of the reversal.
- There’s a volatility contraction now and the buying pressure could continue if the price breaks out higher.
Here are a couple of examples:
The price forms an inside bar after making a push higher.
Silver Daily: The price forms an Inside Bar after making a push higher
Now you’re probably wondering:
“So where do I enter and exit the trade?”
Well, we’ll cover that later.
So, here’s what you’ve learned today:
- An Inside Bar (with a small range) shows indecision in the markets.
- Not all inside bars are created equal. The range and body of an inside bar matter.
- Inside bars can be used to trade reversals or trends (it depends on the context of the markets).
- The Hikkake Pattern is essentially a false breakout of an inside bar — a powerful pattern to profit from trapped traders.
- Inside Bars with a small range are better breakout candidates as they offer a more favourable risk to reward.
Now it’s your turn…
How do you trade the inside bar pattern?
Leave a comment and share your thoughts with me.