Learn how to trade the Inside Bar Candlestick
Pattern with this comprehensive guide for beginners. Discover how to identify,
interpret, and trade this powerful pattern for better trading decisions.
Table of Contents:
- What is the Inside Bar Candlestick Pattern
- How to Identify an Inside Bar Pattern
- Why is the Inside Bar Pattern Important?
- How to Trade the Inside Bar Candlestick Pattern
- Advantages of Trading Inside Bars
- Limitations of the Inside Bar Pattern
- Conclusion
- FAQs about Inside Bar Candlestick Patters
What is the Inside Bar Candlestick Pattern?
The Inside
Bar Candlestick Pattern is a two-bar candlestick pattern often seen in
technical analysis of financial markets, such as stocks, forex, and crypto
currencies. This pattern represents a period of consolidation, where the price
range of the second candle (the inside bar) is completely within the range of
the previous candle (the mother bar). The inside bar indicates a state of
indecision in the market, as neither buyers nor sellers are in full control.
Simply
put, the inside bar is a sign of market pause or hesitation among the traders
before the next big move to start either side.
The inside bar candlestick can be seen in different financial
securities such as stocks, indices, ETFs, crypto currencies, and forex markets.
How to Identify an Inside Bar Pattern
Identifying
an inside bar in pattern charts is straightforward and traders generally follow
these steps:
Look
for two candles: At first we have to identify a candle with a measured high and
low of larger range which is the first candle. We call it as the Mother bar .And then to search for the next candle.
Comparison
between the high and low range: Then we have to check the second candle high
and low range is fully contained within the high and low range if the prior
candle or mother candle. We call this second candle as the Inside bar.
Key Characteristics:
1.
The second candle (inside bar) must have a smaller range than the first. Sometimes,
we can see a second candle or inside bar of the same high and low range. But we
don't consider it as an inside bar candle.
2.
Both the high and low of the inside bar must be within the range of the mother
bar, and smaller than the mother candle. This can give us the confirmation of a
inside bar candlestick pattern formation.
The
inside bar pattern is usually found after a significant move and suggests that
a breakout may soon occur in either direction.
Why is the Inside Bar Pattern Important?
The
inside bar pattern is important because it typically represents market
consolidation, which often leads to strong price movements. When traders spot
this pattern, it tells them that a breakout is likely coming, either to the
upside or downside.
This
makes the inside bar a valuable tool for breakout traders. The pattern signals
a "pause" before the next major market move, offering traders a good
opportunity to enter the market at a favorable price.
However,
inside bar candle can be formed at market key levels or at key support or key
resistance levels. These areas are called areas of value from where the market
may reverse. By identifying these areas of value we can get swing trading
opportunities above the high of the inside bar candle for bullish inside bar
breakout trade.
On
the other hand, we can get trading opportunity below the low of the inside bar
candle for bearish inside bar trade. In both cases, the stop loss should be the
low of the mother candle in bullish breakout trade and high if the mother
candle would be the stop-loss in bearish inside bar trade.
How to Trade the Inside Bar Candlestick
Pattern
Trading
the inside bar pattern involves identifying the setup and deciding how to
position yourself in the market. Here’s a step-by-step approach:
Identifying the Trend: When we see an inside bar candle on the chart, first we need
to mark the high and low of the inside bar candle. Both the high and low of the
inside bar candle are used as the trigger point. The inside bar works best when
traded in the direction of the prevailing trend. If the market is trending
upward, look for a bullish breakout. In a downtrend, expect a bearish breakout.
Waiting for a Breakout: Once we spot the inside bar, we will wait for a breakout
above or below the inside bar candle's range. The breakout confirms whether the
market will move higher or lower.
Keeping a Stop-Loss: As soon as we enter the trade we must keep
stop- loss. If we take bullish breakout trade above the high of the inside bar
candle, we should keep our stop-loss below the low of the mother bar candle.
And in case of bearish inside bar trade we should keep our stop-loss above the
high if the mother bar.
Profit Target: We should keep our profit target minimum at
1:3 risk-reward ratio, or will keep our target at next immediate
resistance or support levels or we can trail our stop-loss if trades go in our
favor.
Here is a Real-Time Example of a Bullish Inside Bar Candle Breakout Trade:
On 5th August, 2024, we
have identified an inside bar candlestick pattern on the daily chart of Nesco
Limited. On the first day (5/8/2024) a big red candle was formed that closed just below the 200 EMA line, which was an area of support of the security at Rs.833.The range of the candle was marked a high of Rs.877 and low was Rs.833.The next day on 6th August, 2024,a second candle was formed, the high and
low range was within the mother bearish candle and it was smaller range than
the prior candle.
On 7th August, 2024
(on the third day), one can enter into the trade going long above the high of
the inside bar at Rs.867 keeping a stop-loss below the low of the inside bar at
Rs. 846 or below the low of the mother candle at Rs.833 as per one's risk
appetite. The profit target should be at its immediate resistance level at
Rs.942 which is a good risk-reward trade. You can see that it touched the high
of Rs.960 within 11 days. It is a great example of a bullish inside bar
breakout swing trade.
If we combine the
inside bar candle breakout with indicators it would give us double
confirmation. In this case we used RSI(60 and 40), the momentum indicator. You can see
from the chart that when the pattern was formed and breakout happened on the
third day, RSI which was below 40 line crossed the 40 line from below to the
upside and the inside bar pattern formed after giving closing above 200
EMA.
Here is an Example of a Bearish Inside Bar Breakout Trade:
Here is a practical
example of daily chart of Asian Paints. On 27th September, 2023 an inside bar
candle was formed on the chart of Asian Paints. The range of the IB(Inside Bar)
was Rs. 3310 and Rs.3270.This range was within the range of the MB(Mother Bar)
which was Rs. 3335 and Rs. 3260.One can take short position below Rs.
3270 keeping stop-loss above Rs.3310.Look at the above chart what a nice
down move the stock has given upto Rs.2950.
If we watch the chart
carefully, we can see that when IB was formed the price was above the 200 EMA.
As soon as the 200 EMA had broken, the RSI was also below the 40 line and the
move was stunning one to the downside. This one could have been a 5 star trade.
This is an AHA Moment!
Both the above trades are the perfect examples
of favorable risk-reward trades.
Advantages of Trading Inside Bars
1. Clear Entry and Exit Points: Inside bar candlestick pattern provides clear and easier ways
to enter and exit trades. Traders can use the breakout of the inside bar or
mother bar( according to one's trade management) to enter and place stop-losses
just above the highs or below the lows of the mother candles range.
2. Low Risk, High Reward: Since the inside bar typically has a small range, stop-losses
can be placed tightly, minimizing risk. Meanwhile, breakouts can lead to
significant price movements, offering high reward potential.
3. Works in All Markets: The inside bar pattern can be used in any market—stocks,
forex, commodities, or crypto currencies. It is a versatile tool for traders in
various financial sectors.
Limitations of the Inside Bar Pattern
While
the inside bar is a powerful pattern, it has its limitations also. We have to
be careful while identifying and trading the inside bar. Some limitations are
as follows:
1. False Breakouts: Not all breakouts lead to strong moves. Sometimes, the price
may briefly break above or below the mother bar, only to reverse and trap
traders in losing positions.
2. Market Conditions Matter: The inside bar works best in trending markets. In choppy or
sideways markets, the pattern can be less reliable, producing false signals.
Conclusion
The Inside
Bar Candlestick Pattern is a simple yet powerful tool for traders,
especially for beginners. It provides clear signals for potential breakouts and
can be used across various financial markets. By understanding how to identify
and trade the inside bar, you can improve your trading strategy and capitalize
on strong market moves. However, always use risk management techniques and
confirmed breakouts with additional tools to minimize false signals. Focus on
practicing maximum number of charts to set your eyes and mind to understand what
the charts are telling. Because, practice makes perfect. Happy reading and keep
growing.
FAQs about Inside Bar Candlestick Patterns
Q1: What Time Frame Works Best for the Inside Bar Pattern?
The inside bar can work across multiple time frames. However, it’s most effective on higher time frames, like the daily or weekly chart, as these patterns tend to produce more significant moves.
Q2: How can I Avoid False Breakouts with the Inside Bar Pattern?
To
avoid false breakouts, it’s essential to wait for a confirmed close above or
below the mother bar’s range. You can also use additional confirmation tools
like volume or moving averages to validate the breakout.
Q3: Can I Trade the Inside Bar in Sideways Markets?
While possible, the inside bar pattern is less reliable in
sideways or choppy markets. It’s best used in trending markets, where breakouts
are more likely to lead to significant price movements.
Q4: Should I only Trade Inside Bars in the direction of the
trend?
Yes, trading inside bars in the direction of the prevailing
trend increases your chances of success. Inside bars in trending markets often
signal continuation of that trend after a period of consolidation.
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
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