A straightforward yet effective candlestick pattern is the Inside Bar. You can more safely timing your entries with its assistance. You can use it to trade market reversals or trends. One of the most common candlestick patterns used in analysis and trading by price action traders is within bars.
What is an Inside Bar and how does it work?
A candle that is covered by the candle before it is called an inside bar. When you observe an inside bar candle, the market volatility has decreased. A two-bar price action trading approach known as an inside bar pattern has an inside bar that is smaller and falls inside the high to low range of the prior bar.
The high is lower than the high of the previous bar, and the low is higher than the low of the prior bar. Its position in relation to the previous bar may be at the top, middle, or bottom. The mother bar is frequently used to refer to the previous bar, the bar that comes before the inside bar.
Some traders define an inside bar more loosely, allowing the mother bar’s and the inside bar’s highs equal or both bars’ lows equal. However, most traders do not normally consider two bars with the identical high and low to be inside bars.
Inside bars indicate a period of market consolidation. On a 1 hour or 30 minute chart time frame, an inside bar on a daily chart will appear as a triangle. They frequently develop after a market makes a significant move when it “pauses” to consolidate before moving on. They can also develop during market turbulence and serve as reversal signals from significant support or resistance levels.
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How to Trade with Inside Bars?
In markets that are trending, inside bars can be played in the trend’s direction. When done so, they are sometimes referred to as breakout plays or inside bar price action breakout patterns. They can also be traded against the trend, usually from important chart levels. When done so, they are known as inside bar reversals.
Place a buy stop or sell stop at the peak or bottom of the mother bar, and when the price breaks above or below the mother bar, your entry order is completed. This is the traditional entry for an inside bar signal.
If the mother bar is larger than average, the stop loss location is typically at the opposite end of the mother bar or towards the halfway point or 50% level.
It’s important to note that while these are the traditional or typical entry and stop loss settings for an inside bar setup, knowledgeable traders may ultimately opt for different entries or stop loss placements.
Multiple Inside Bars
Multiple Inside Bars can be combined. This is a strong pattern since it indicates that market volatility is minimal.
Additionally, market volatility fluctuates constantly, going through phases of extreme volatility and vice versa. Therefore, it’s a clear indication that the market is ready to make a significant move shortly when you observe several Inside Bars together.
Inside Bar Trading Strategies
You can filter out the trades with a better likelihood to add to your trading arsenal by employing the strategies outlined below.
Avoid Inside Bars in Sideways Market
Inside bars are periods of low volume or momentum trading, and when the whole market is locked in a low volume sideways rhythm. It is certain that a trader hunting for inside bars will encounter a lot of noise.
Stick to Higher Time Frames
While it is true that price action applies equally to all time frames. This is not the case for inside bars, contrary to popular belief. We are actually more concerned in the order flow/price action components of low volume trading when we talk about how it appears as within bars on the charts.
However, a variety of additional factors, some of which may not be related to the technical features of trading, can also influence traders’ interests in intra-day markets.
Bottom Line
An Inside Bar with a narrow range indicates market uncertainty
Inside bars come in several varieties. An inside bar’s body and range must be considered. Reversals or the trend can be traded using the inside bar strategy. It depends on how the markets are set up.
Since the risk to reward is better, inside bars with a narrow range are stronger breakout candidates.
