Inside Bar Candlestick Pattern Quick Start Profitable Strategy
Inside Bar candlestick pattern is a two candlestick or price action bar pattern that can be used on both bar charts and candlestick charts. It consists of one candlestick or bar with a larger body and a second bar / candlestick with a smaller body.
To keep things simple, we’ll look at the inside bar candlestick pattern, in which the high of the inside bar is lower than the previous day’s high and the low is higher than the previous day’s low.
The candlestick with the larger body is also known as the “mother candle” and the other, smaller candle is contained within the body of the first candle.
Table of Contents
- What Is the Meaning of an Inside Bar Candlestick?
- How to Use the Inside Bar Candlestick Pattern?
- Inside Bar Candlestick Pattern Trading Strategy
- Pros & Cons Of Inside Bar Candlestick Pattern –
What Is the Meaning of an Inside Bar Candlestick?
Inside bar candlestick signifies temporary pause in a trend, significance of inside bar candlestick increase during strong trends, as breakout from the pattern may provide a reliable continuation signal.
However, if an inside bar candlestick pattern appears within a trading range, it is of little use to price action traders.
When combined with price action patterns, the inside bar candlestick provides even more excellent opportunities because it acts as confirmation to chart pattern breakout.
How to Use the Inside Bar Candlestick Pattern?
Inside bar candlestick pattern is used in price action trading in following ways –
- To calculate immediate support and resistance level
- Inside bar candlestick breakout signal trading
- Trend continuation candlestick pattern
- Trend Reversal candlestick pattern
- To calculate short term trailing stop loss
In this blog we are going to keep our focus on Inside bar candlestick pattern trading strategy.
Inside Bar Candlestick Pattern Trading Strategy
Many traders do not explicitly use an inside bar trading strategy but incorporate them into their existing trading setups, in other words, they use inside bar candlestick patterns as an additional confluence to the signals they already have.
I am going to share with you the trading strategy which is based on price action with combination of inside bar, generally inside bar appear after an volatility expansion they provide us with high risk to reward trades.
There are three possible ways to place entry with Inside bar trading strategy –
Inside Bar Pattern Trend Continuation Entry
- Setup – Strong ongoing trend ( uptrend or downtrend), Inside bar pattern appears at the end of an uptrend or downtrend.
- Entry – Enter if candle next to inside bar closes above the high of the pattern in case of uptrend and below the low of the pattern in case of downtrend-
- Stop Loss – Stop loss shall be placed slightly below the inside bar pattern for long entry and above the inside bar pattern for short entry.
- Logic Behind the Trade – During trends inside bar patterns act as momentary pause in price action, it tells us that prices may continue to move in trend direction if breakout from the pattern is successful, hence we shall trade in the direction of major trend.
Inside Bar Pattern Trend Reversal Entry
- Setup – Market is in uptrend or downtrend, inside the bar pattern appears at or near major support or resistance levels.
- Entry – In this case due to major key levels nearby there is a higher chance of trend reversal and inside bar pattern breakout in opposite direction to the ongoing trend confirms the reversal. In case of upturned presence of strong resistance nearby and candle next to the inside bar closing below the low of pattern triggers short entry due to trend reversal.
In the case of a downtrend, the presence of a strong support level nearby and a candle next to the inside bar closing above the pattern’s high confirms a bullish reversal and thus a long entry is placed.
- Stop Loss – Stop loss is slightly below the inside bar in case of long entry and above the inside bar for short entry.
- Logic Behind The Trade– Prices seems to react to the key support and resistance levels, especially if they are strong, if inside bar appears at major support and resistance levels it tells us about the indecision of market participants, breakout of prices from inside bar prove to be extra confirmation of trend reversal and hence entry is placed.
Inside Bar Chart Pattern Breakout Entry
- Setup – Prices are trending, Formation of flag or pennant during trend, accompanied by inside bar at the boundary of pattern.
- Entry – Formation of continuation chart patterns such as flag and pennant during an uptrend or downtrend, inside bar appears and prices breakout after the inside bar formation also being a valid chart pattern breakout confirms the entry in direction of the breakout.
- Stop Loss – In case of flag chart pattern breakout the boundary of pattern acts as an stop loss, however since inside bar candlestick pattern provides much reasonable stop loss point you might consider area below inside bar as potential stop loss, in case of pennant also the same should be followed.
- Logic Behind The Trade – Flag and pennant breakout are excellent continuation patterns with very good risk to reward, combining inside bar confirmation for the breakout gives that extra confluence and winning probability for long as well as short trades.
Pros & Cons Of Inside Bar Candlestick Pattern –
Like any other candlestick pattern inside bar has its pros and cons, while trading inside bar can be a very simple yet powerful trading strategy many times market manipulation and fake breakouts may be a very frustrating experience for new traders.
Let us now learn about some of the pros and cons of inside bar candlestick pattern –
- Inside bar candlestick pattern is very straightforward and simple to trade, no ifs and buts involved it is good for beginners to start trading with.
- Inside Bar candlestick pattern provides excellent stop loss point, risk to reward ratio remains pretty good.
- Inside bar pattern allows you to trail stop loss for example in case of long trades, stop loss can be trailed using low of previous candlestick.
- Inside Bar candlestick pattern can be used with other confluence factors such as support and resistance, fibonacci retracement levels, pivot points and chart patterns to increase the probability of profit.
- Inside Bar pattern works very good in trending markets.
- Being very simple trading strategy has its own disadvantages also , many traders are trapped especially in manipulated markets.
- Fake breakouts are hard to spot and prices might hit stop loss several times before eventually going in the direction of trade.
- Volatility acts against the inside bar trading strategies, risk to reward gets significantly compromised in volatile markets.
- During range bound price movement, inside bar pattern trading fails miserably and should be avoided at any cost.