Understanding Inside Bar Strategy

What is an inside bar candlestick pattern?

An inside bar is a candlestick pattern of two candles that occurs when the high and low range of a candle is confined within the high and low range of the preceding (or previous) candle.

Visually, the pattern formation appears as a smaller candle is engulfed within the body of the previous candle. Generally, the pattern represents a temporary equilibrium in the market, indicating indecision or consolidation within the traders.

The inside bar formed shows that the price is not able to break above or below the range of the previous candle. This confirms that neither the bulls nor the bears are dominant during the price action.

How to identify an inside bar?

To identify the inside bar, look for two candlesticks and check if the high and low range of the 2nd candle is entirely within the high and low range of the preceding candle. Once the follow-through candle meets the criteria, it can be confirmed as the inside bar.

The inside bar consists of a smaller candlestick, referred to as a “child” candle. The child candle is completely engulfed by the preceding candlestick known as the “Mother” candle. The high and low of the child candle should be within the high and low of the mother candle.

Market relation with the inside bar

• If an inside bar is formed in a strong trending market, it indicates a small pause in the trend before the price reverses back into the trend.
• If an inside bar is formed near the major support or resistance lines, it shows a possible sign of price reversal.

Types of Inside Bar Candle

Inside Bar With A Small Range 

It is a standard inside bar in which the range of the inside bar is small compared to the previous candle range i.e. mother candle. This pattern formation indicates indecision present in the security or represents low volatility.

Inside Bars With A Large Range 

In this type, the range of the inside bar is large but, it is smaller than the mother candle range.A large body inside the bar within the mother candle indicates a strength of reversal, based on the close of the candle it can be a bullish reversal or bearish reversal

A large range inside the bar with a small body indicates an indecision present in the security.

Multiple Inside Bars

It is a type of inside bar pattern in which more than one inside bar is formed together, it indicates a low volatility in the security which signifies weaker price movements. But it can also signal sometimes a bigger move could be due in the market.

Strategies With Inside Bar Candle

There are different ways of strategies using inside bars, either a new entry can be spotted or an existing position can be managed.

The most common strategies are:-

• Inside bar breakout
• Inside Bar reversal
• Inside Bar trend trading

Inside Bar Breakout

The first key to trading inside the bar as a breakout strategy is identifying a strong trend either an uptrend or downtrend. When the price is in a strong downtrend, continuously making new lows, the inside bar formation represents a pause in the price action where some profit booking can be seen.

So, one can trade this position by entering short positions when the price breaks below the inside bar pattern. The stop loss for the position can be the high of the pattern formation. In a strong uptrend making new highs, the inside bar formation represents a pause in the price action where some profit booking can be seen.

An entry is placed when the price breaks above the inside bar pattern high. The stop loss for the position can be the low of the pattern formation.

In a sideways market, the inside bar breakout strategy is not advised because the consolidation present in the security indicates the indecision in the bears or bulls.

Inside Bar Reversal

The inside bar reversal strategy is where the inside bar forms at a key support or resistance level as a sign of reversal. For example, if the price approaches a support level we know that a support level is one where there can be a higher chance for demand for the security or the buyers willing to enter a long position.

If the inside bar is formed at the support level then it could be a sign of price reversal. Entry will be above the price close of the inside bar formation. Stop loss can be placed at the line of support.

If the price action is near the resistance level and the formation of the inside bar pattern, it indicates a sign of reversal. Entry to a short position can be placed in a security. Entry will be below the closing price of the inside bar formation. Stop loss can be placed at the line of resistance.

Inside Bar Trend Trading

In this strategy, inside bar formation helps to capture the bigger trend directions. We shall combine the moving average with the inside bar pattern formation.

An entry to the long position can be placed when the price closes above the high of the inside bar pattern. The stop loss will be the moving average line and it can be trailed (along with the MA line) when the price starts moving in one’s favor.

When the price of a security is below the moving average, an inside bar formation at the resistance of the moving average indicates a sign of more downtrend.

An entry to the short position can be placed when the price closes below the low of the inside bar pattern. The stop loss will be the moving average line.

Best Time Frame

The inside bar patterns can be formed and identified in all the time frame charts, but inside bars on higher time frames are more reliable and significant than those on lower time frames. For example, if an inside bar is formed in a 1-minute time frame chart, it indicates indecision for 1 minute. If an inside bar is formed in a daily time frame chart, it indicates that neither the bulls nor the bears could gain control of the market the whole day. Traders can choose the relatable time frames for different market setups from intraday to positional setups.

Conclusion

From the above learnings of the inside bar strategies, it is clear to make use of the pattern in several market conditions for valuable insights. With the different types of inside bar patterns, small ranged inside bar breakouts are preferred because they define tight stop loss with identical reversal.

As the pattern indicates indecision, where and how the pattern is formed is important to analyze the price action. As always learn the pattern and backtest to master the easy identification with good risk management.