As mentioned above, the inside bar is a two-candlestick pattern that may appear in any market scenario. Identifying the inside bar is not rocket science, and once you have a basic understanding of what it looks like, you will be able to locate it instantly on price charts. You just need to remember a few rules to identify the pattern correctly.

  1. The inside bar shows a reluctance of prices to progress above/below the preceding candle high and low indicating market indecision.
  2. Therefore, the inside bar is looked at for a short-term trade (or swing trading) in the counter-trend direction with the goal of holding the trade for less than 10 bars.
  3. However, they can also form at market turning points and act as reversal signals from key support or resistance levels.
  4. This is one of the most popular technical chart patterns around and there are several trading strategies that utilize this pattern.
  5. You can reference the low of the Inside Bar to set your stop loss (the smaller the Inside Bar, the smaller your stops).

AI for algorithmic trading: rethinking bars, labeling, and stationarity helps traders of all levels learn how to trade the financial markets. When combined with other tools or indicators, trading with the inside bar provides an excellent and straightforward smart trade management strategy. Although it is not a decisive chart pattern like many other chart patterns, it certainly enables traders to find many trading opportunities. So, you cannot trade every single inside bar the same, as you may not know if the trend will reverse or continue. Instead, it would be best to interpret the pattern differently on the market scenario and decide the next price direction.

Bonus: Inside Bar price action analysis

The inside bar is a popular reversal/continuation candle formation that only requires two candles to present itself. This pattern is a direct play on short-term market sentiment looking to enter before the ‘big moves’ that may take place in the market. The inside bar shows a reluctance of prices to progress above/below the preceding candle high and low indicating market indecision.

Full Introduction on the Inside Up/Down Candlestick Pattern.

Still, the inside bar allows you to identify a pause in price action and a good market entry level before the next price movement. A key characteristic of well-functioning financial markets is high liquidity, which means it is easy to make large trades at low transaction costs. But when traders fear losing money to counterparts with inside information, they charge higher transaction costs, which leads to less liquidity and lower investor returns. And since a lot of people have a stake in financial markets – about half of U.S. families own stocks either directly or indirectly – this behavior hurts most Americans.

What is an Inside Bar Pattern?

When used with other technical indicators, such as support and resistance levels, it can provide a trader with a high probability setup. The key to trading inside bars is to wait for a breakout in either direction before entering a trade. This ensures that you are trading with the trend and not against it. Although there are no guarantees in trading, following this strategy can help you increase your chances of success.

Before starting Trading Heroes in 2007, I used to work at the trading desk of a hedge fund, for one of the largest banks in the world and at an IBM Premier Business Partner. If you trade every single Inside Bar signal, you WILL blow out your account. Price action becomes “compressed” into a tighter range and at some point, it has to break out and resume normal volatility. You don’t inside bar trading strategy need to know why Inside Bars happen, you just have to understand what the price action is telling you. When the high of the previous bar (or candle) is higher than the current bar and the low of the previous bar is lower than the current bar, then current bar is an Inside Bar. As mentioned earlier, InSide Bars can vary in terms of size, and can also vary in range, color, etc.

There are 2 basic types of Inside Bars that traders use to enter trades. Coiling inside bar patterns occur when 2 or more inside bars are “coiling” up tighter and tighter like a spring, within one another. Furthermore, since inside traders profit from privileged access to information rather than work, this makes people believe that the system is rigged. Punishment, if you’re convicted for insider trading, can range from a few months to over a decade behind bars.

It is important to note that this article only covers the basics of inside bar strategies. Traders have developed a significant number of advanced strategies using inside bars to recognize and trade potential reversals, and bearish patterns, and better recognize current trend reversals. In the chart below, we can see an example of a good inside bar reversal signal. Notice that the inside bar formed at a key chart level, indicating the market was hesitating and “unsure” if it wanted to move any higher. We can see a strong downside move occurred as price broke down past the inside bar’s mother bar low..

Should this bearish candle close under the inside bar low it is at less risk of reversal. Always, be wary of short positions as they can face significant potential losses. The InSide Bar Strategy is a significant candlestick pattern that helps traders time entries with low risk.

For example, if the first model says “up”, but second says something like 0.05, it means that even the price will go up, most probably we won’t hit the take profit goal. will not be held liable for the loss of money or any damage caused from relying on the information on this site. Trading forex, stocks and commodities on margin carries a high level of risk and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite.

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. For example, the inside bar pattern could also be formed with a large first candle and a second tiny Doji candle. Technically, as long as the first candle covers the second candle, then it’s an inside bar pattern. Sometimes, you can trade an inside bar as a reversal / stall pattern where price “stalls” out at a level and that leads to a reversal back the other direction.