Understanding What is an Inside Bar in Trading Systems

Its relative position can be at the top, the middle or the bottom of the prior bar. Market Context – The inside bar is a neutral pattern that can occur in any market trend (uptrend, downtrend, or even sideways). It must then be followed by a third candle that serves as a confirmation candle to indicate the likely direction moving forward. In contrast, the harami is exclusively a reversal pattern that must occur in either an uptrend (bearish harami) or a downtrend (bullish harami).

Why You Shouldn’t Trade Pin Bars As Reversal Signals

For more information on trading inside bars and other price action patterns, click here. At the very least, for my trend trades, I am going to pay more attention to wide range inside bars that closed in my direction with increasing volume. Inside bars represent an area of congestion, in which price range contracts.

An ideal breakout is one accompanied by significant volume, as demonstrated above, which confirms the strength of the move and helps to avoid potential ‘fakeouts’ or false breakouts. To trade with inside bars, you can use a breakout strategy or trade against the trend. In a breakout strategy, you place buy stop or sell stop orders at the high or low of the mother bar and enter the trade when price breaks out. When trading against the trend, you look for inside bars at key support or resistance levels to indicate potential reversals. This time, it’s more of a reversal pattern because it formed at a resistance level, causing a false break of that resistance level and then set off a move to the downside. We can see a dramatic sell-off unfolded as price broke down below the inside bar.

1. It’s important to check and update your risk management plans as the market changes.
2. This is why trading this pattern can be so profitable – you are essentially buying or selling a breakout, or continuation of the preceding trend.
3. Conversely, longer time frames might be too extended, reducing the effectiveness of the Inside Bar pattern in signalling ideal market continuation or reversals.
4. Additionally, pay attention to key support and resistance levels and use proper risk management techniques.

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. The meaning of an inside candle that is bullish refers to an inside bar, after which the price moves upwards. When this pattern forms during an uptrend, it suggests a temporary pause or consolidation in price before the uptrend potentially resumes.

We’re also a community of traders that support each other on our daily trading journey. During a prevailing downtrend, the inside bar takes shape by confining its trading range entirely within the high and low of the preceding bar. This containment within the boundaries of the prior bar reflects how to trade inside bar a delicate equilibrium between buyers and sellers. It suggests a potential shift in dynamics, with bears potentially losing strength and bulls gaining ground. 2) The inside pin bar combo setup is simply a pin bar that’s also an inside bar. In other words, a pin bar that’s within the range of an outside bar or mother bar.

Pin bar and inside bar combination patterns are some of the most potent price action signals you will encounter. 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. HowToTrade.com helps traders of all levels learn how to trade the financial markets. Some traders define an Inside Bar based on the high and low of the bar, while others consider the open and close. According to the first definition, an Inside Bar has a higher low and a lower high than the previous bar.

Now you have an idea of what an inside bar looks like, let me share with you on how you can actually go about entering a trade on an inside bar. Because it’s contained within the range of the previous candle high and low. Keep in mind that we’re talking about the entire range of the candle from high to low, including its shadows. We need to see additional factors that tell us that the potential profit is worth the corresponding risk. And that’s not always easy, because you have to consider several components at once. Now let’s take a look at the same setup, only this time we will look back a few weeks to see why this setup didn’t work.

For beginner traders, it’s generally recommended to trade inside bars in line with the dominant trend on the daily chart. This aligns your trades with the overall market direction, increasing the probability of success. However, more experienced traders may also look for countertrend inside bar setups at key support or resistance levels, utilising their analysis and discretion to identify profitable opportunities. Inside bars can be traded in trending markets or from key chart levels.

If you need more clarity on the market trend, you can place the 20 EMA indicator as a trend guide just as we did on the Meta chart up there. For instance, an ‘Inside Hammer’ is when the second bar is both an Inside Bar according to the selected definition and shaped like a ‘Hammer’. This pattern can occur either due to using a very small timeframe or because the market is in a flat. The Japanese yen remains under pressure, trading near a five-month low against the US dollar. This trend is primarily driven by differences in monetary policy approaches. Unlike the Inside Bar, where the second candle is within the range of the first, an Outside Bar occurs when the second candle has a higher high and a lower low than the previous bar.

The Inside Bar Pattern is broken when the price breaks the parent bar in the setup shown previously. This does not have to happen immediately after the Inside Bar setup—when the price takes a long while to break out from the range of the parent bar, the subsequent breakout is often more decisive. The Inside Bar pattern works best when the market is currently trending. The stronger the trend, the easier it is for the pattern to provide a reliable signal. If the market is not showing any certain trend, the Inside Bar pattern will not be able to form due to the uncertain market movement. The classic entry for an inside bar signal is to place a buy stop or sell stop at the high or low of the mother bar, and then when price breakouts above or below the mother bar, your entry order is filled.

Conclusion: Harnessing the Power of Inside Bar Patterns

In contrast to inside bars, marubozu candles are long-bodied, single-candlestick patterns with little to no wicks, signifying a decisive move in the direction indicated by the candle’s color. Essentially, they represent the opposite of inside bars, which indicate a period of indecision and uncertainty when they occur. Therefore, when the inside bar forms, the pattern hints that the market is consolidating the previous trend.

We have an inside bar on the daily chart in a strong downtrend…everything looks good. An inside bar – as the name implies – is a candlestick that forms inside the range of the candlestick immediately prior to the inside bar itself. The shorter range of the inside bar can often be a very effective indicator of market momentum – or rather lack thereof. 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. Placing pending orders at the inside bar’s boundaries means the order will automatically trigger when the price reaches the breakout level.

1. In the first case above, an entry on the break of the inside bar low would have yielded some solid pips.
2. By noise I mean frequently appearing inside bars that do not quite trigger price moves that you would expect when you trade them.
3. This pattern continues for days, weeks or even months until new buyers are able to once again outweigh the sellers and drive the market higher.
4. Volume – Since the inside bar pattern typically marks a period of indecision or uncertainty, the volume on the second candle should ideally be below average.
5. Discover how these patterns unlock strategic insights, ideal stop-loss positions, and opportunities for successful trading.

The Trend is Your (Best) Friend When Trading Inside Patterns

Optimal conditions arise when the market exhibits a clear and robust trend. The stronger the trend, the more reliable the inside bar pattern becomes in providing accurate signals for potential breakouts, reversals, or continuations. One particularly potent scenario is the formation of an inside bar immediately following a price breakout.

The market closed above its previous close on March 29, followed by an inside bar on March 30, followed by a close above the previous day’s close on March 31. On the daily chart of gold (GC) in Figure 1, a setup formed on May 13, 2010, and an inside bar formed on May 14 and completed on May 17. The market closed below its previous close on May 13, followed by an inside bar on May 14, followed by a close that was below the previous day’s close on May 17. When using the inside bar trading strategy, it’s crucial to set stop-loss orders and control how much you trade. Experts suggest using a risk-reward ratio that fits your trading goals. Maybe they don’t have the appeal of pin bars and engulfing candles, or it could be because it’s a little more complicated to understand than other price action signals.