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. Even though the pattern is known as having a structure with one large bullish or bearish first candle and a second smaller candle, it could have many other chart formations.
Risk averse traders will usually prefer to place the stop loss beyond the high or low of the candlestick preceding the inside bar – that is, the candlestick that the inside bar is inside of. This is to provide a meaningful buffer to a potential trade and avoid being ‘whipsawed’ out of the market through using a stop loss too tight and aggressive. To some, this is a notorious fact ultimately even leading to the disposal of this candlestick pattern from their technical analysis arsenal. For other smarter traders who know where to look for them, these puny looking candlesticks can be valuable pieces of information. By following these steps, traders can effectively trade inside bar breakouts and potentially profit from the subsequent price movements. The formation of an inside bar signifies a temporary pause in price action, prompting traders to analyse the delicate balance between buyers and sellers.
Examples of Inside Bar Patterns in Different Markets
At the heart of this pattern lies the Inside Bar and the Mother Bar. The Inside Bar, a compact formation, is enveloped within the high and low range of the preceding Mother Bar. This distinctive structure aids in recognising the delicate balance between buyers and sellers, offering a visual representation of the market’s hesitancy before a decisive move. 1) The pin bar + inside bar combo, consists of a pin bar that consumes a small inside bar toward the nose of the pin (the pin bar’s real body). Theoretical calculations show only a modest positive return from trading inside bars. In reality, this could easily turn into losses due to commissions, slippage, and other costs.
- Market Context – The inside bar is a neutral pattern that can occur in any market trend (uptrend, downtrend, or even sideways).
- Again, this assumes that you are placing your stop loss above the high of the inside bar rather than the high of the mother bar.
- Multiple inside bars can form in a strong trend, indicating a consolidation phase before the next significant move.
- This formation indicates a period of market consolidation or indecision but does not necessarily signal a trend reversal.
- The reliability of the inside bar strategy in trading depends heavily on the market context and the effective use of complementary technical analysis tools.
Volatility is cyclical—a contraction will eventually be followed by an expansion in price, i.e., at some point, the price will break out of an Inside Bar Pattern. Price action analysis will be the key to determining whether the price will break out in the direction of the previous momentum or be a reversal. However, if I see the second candle as much shorter than the first, for example, less than half its length, I will treat it like an Inside Bar Setup. The size of the Inside Bar with respect to the mother Bar depicts how accurate the bar setup signal will be. The smaller the size of how to trade inside bar the Inside Bar compared to the Mother Bar, the higher the chance of the market signals being accurate and vice versa. Ideally, the Inside Bar should form within the Mother Bar’s upper or lower half.
What is the best time frame for using the inside bar pattern?
It is commonly understood that price action is just as relevant across all time frames, and while that is true, I will bravely want to disagree with that when it comes to inside bars. There are several ways to trade inside bars that stem directly from the trader’s individual risk appetite and possibly the overall strength of the setup itself. Here we picked a random chart and plucked 14 inside bars that are technically valid – that is, they fall within the range of the candlestick prior to them. This should give an idea how frequently you can expect to encounter inside bars as you start looking for them.
- We can see a dramatic sell-off unfolded as price broke down below the inside bar.
- It allows them to anticipate potential market movements and make informed trading decisions.
- As you may well know, markets spend most of their time consolidating or ranging, so finding a favorable inside bar setup within a trending market can be a challenge.
- Trends can be the most profitable market condition to make money if a trader can find a reliable entry mechanism—that is where an Inside Bar Pattern can help.
- In practice, the chance of making a profit with this simple approach is about 50% (not including costs).
- The Japanese yen remains under pressure, trading near a five-month low against the US dollar.
- These levels are rarely exact, and it is more practical to consider them zones instead.
The indicator highlights this area, reflecting a balance between supply and demand. 1 — the inside bar in the indecision zone that has been highlighted by the indicator. Select “Inside Bar” from the list, add it to the chart, and click OK. For more details on the indicator and its settings, check the Knowledge Base. Or activate the advanced tariff right now to access the full range of functionality.
For instance, when analysing a strong uptrend, multiple inside bar patterns forming during the trend provide traders with recurring opportunities for well-timed entries. Inside pin bars are exactly what their name suggests; pin bars that are also inside bars. These setups seem to work best in trending markets and on the daily chart time frames.
First, traders may encounter false signals when an inside bar setup appears on their chosen time frames. While whipsaws can occur with any candlestick pattern, they can be more pronounced with inside bars. This is because traders often rush to act on this setup without fully considering market context, sentiment, and the overall price structure. Even when ‘confirmed’ by the third candle, inside bar trade setups should not be viewed as foolproof signals. Multiple inside bars can form in a strong trend, indicating a consolidation phase before the next significant move.
The image above is a recent example of how you could have used inside bars as a method of scaling into trades. The best way I think inside bars should be used is as a method of scaling into trading positions. With our pending order placed all we need to do now is wait for the market to break the low of the mother candle. An Inside Bar must stay completely WITHIN the range of the bar immediately before it. The value of your portfolio can go down as well as up and you may get back less than you invest. Investing in Stocks, Commodities & Currencies may not be right for everyone.
In these scenarios, reduced price volatility and confinement within the range of the previous bar indicate either an increase in buying pressure or a decrease in selling pressure. However, this ‘pause’ doesn’t necessarily signal clear strength from either camp. The effectiveness of the inside bar pattern is closely linked to the size and placement of the Inside Bar concerning the Mother Bar.
Advantages and Disadvantages of Inside Bar Trading
If using the more aggressive stop loss strategy, this means selecting inside bars that form near the upper or lower range of the mother bar. This allows you to achieve a much more favorable risk to reward ratio. It means always keeping your risk to no more than half the potential reward.
Key Takeaways
Therefore, a trade would anticipate a bearish break below the inside bar pattern. When an inside bar develops, check the RSI oscillator to gauge whether there is underlying strength or weakness in the market. In the EURUSD example above, then the inside bar pattern appeared, the RSI value was at 40 exhibiting a weak price trend. If an inside bar formed inside two higher closes, then it is considered to be a three-bar inside bar positive reversal. If an inside bar formed inside two lower closes, then it is considered to be a three-bar inside bar negative reversal.
Here’s how I would’ve entered the inside bar trade we looked at earlier. The chart below shows multiple inside bars in a consolidating market. Note once again that we’re only focused on the mother bar’s high and low, which forms the range of that period. These two competing actions, one set of traders taking profits vs one set of traders buying is what creates the inside bars. Inside bars are either one or more candlesticks which are contained within the range of one candle, this candlestick is usually referred to as the mother candle.
If that reversal does not occur relatively quickly within the first breakout, the chances of it being a valid trade are less. Remember, this rule focuses on the highs & lows relative to the Inside Bar, not the parent bar. These are just the finding of a curious price action trader playing with his Ninjatrader back-testing function. The inside bar pattern differs from the NR4 pattern regarding the number of candlesticks involved. For those unfamiliar, NR4 was a pattern discovered by Tony Crabel that has similar characteristics to the inside bar.
