An inside bar pattern is a pattern that occurs regularly within the financial market, and implementing it within the trading system can help traders boost their market analysis.
Finding an inside bar that benefits you can be difficult because markets often spend a lot of time consolidating. This is why I’m here to help you with it.
What is Inside Bar?
As the name says most of it, the Inside bar pattern engulfs the insides of a mother candle, which is why some may call it the mother-baby pattern few people call it the Inside Bar candlestick pattern. This pattern is formed after a large move in the market representing the period of consolidation.
Once you learn how to trade it properly, the Inside bar pattern can be a really powerful price action signal. Let’s have a look at some interesting facts about it.
Facts About Inside Bar Pattern
- The inside bar pattern is made up of two candlesticks.
- The mother candlestick can be, bullish (green) or bearish (red).
- The chart pattern can also be either bullish or bearish.
Psychology Behind the Inside Bar
Now, to understand the concept of the Inside bar and its working, we need to understand the psychology behind it. So let’s dig in.
Inside Bar represents a sense of indecision or consolidation in the market. Most of the time, it is formed when there’s quite a strong move in the market as after that, it pauses to consolidate the market before it makes a big move again. But still, they can also be at a market turning point and then can act as a reversal signal.
How to Trade in Inside Bar?
Inside-bar patterns are traded in trending markets according to the trend’s direction. They are referred to as breakout trading at this point. However, there’s no hard-and-fast rule to it as they can also be traded against the trend, typically from a key-chart reversal. They are known as major chart reversals at this point.
Trading in a trending market
Have a look at the image given below, Here, you can see how to trade an inside bar with the market’s current trend.
Trading inside bar against the trend
The image given below shows the patterns when the inside bar patterns end the current market trend and form a trend reversal entry signal.
Let’s now move ahead and comprehend some crucial characteristics to comprehend the inside bar setup pattern.
Characteristics of Inside Bar Pattern
Understate are 4 major characteristics that one should learn while dealing with the Inside bar setup pattern:
- Go with a suitable time frame
The most important thing about setting up the inside bar candlestick pattern is the time frame you use. Generally, while analyzing inside bar chart patterns, any time frame that is less than a daily chart should be avoided.
- It’s perfect for trading
When you start trading based on the inside bar, you should first look at the market’s current trend. There are certain types of markets where this inside bar pattern doesn’t work that well like a sideways market.
The best inside bar is formed when there is already a clear trend. Once the inside bar breaks the high of the mother candle, it will work great and the trend will continue.
- Their sizes
The sizes of the inside bar in comparison to the mother bar are quite very important. The smaller the inside bar than the mother bar, the more there are chances of you making a profit out of it.
- Entry, Exit, and Stop loss
Entry Is when the next candle breaks/breakdown inside the bar. Exit should be once it is given you profit as per your risk and reward ratio. And finally, the stop loss should be located at the bottom/top of the inside bar.
How Reliable is The Inside Bar Candle?
What makes this trading pattern complex is the inside bar signal continuation or reversals. Plus, sometimes some false breakouts diminish the reliability level of the inside bar. And this is the reason that traders start to use inside bars as a part of their trading strategy but lose faith once they have few losses.
Let’s now have a look at some major advantages and disadvantages of the same:
| Advantages | Disadvantages |
| It occurs quite frequently in the financial markets. | The only disadvantage of it is that it could mean that the patterns will change or stay the same. |
| It provides traders with an opportunity for favourable risk-rewards ratios. | – |
| When it comes to novice traders, it is quite simple to identify the inside bars. | – |
