When inside bar forms after an impulsive wave then it wants to convey a message to traders that the market is deciding its future direction either to go up or down. Breakout of the inside bar tells us the future direction of the market that big traders or institutions have decided. Some people may only focus on identifying the pattern and making their trades, without trying to understand what the surrounding candlesticks are saying. It could also mean that the rally is taking a breather and would break out of the pattern to continue climbing. Some other times, the breakout fails, and the price reverses, creating a bearish hikkake pattern.

Both are widely used by traders for technical analysis and identifying potential trading opportunities. To enhance their analysis, traders combine the formation with other technical indicators and utilise effective risk management strategies to manage potential losses. The inside bar pattern is characterised by two consecutive candlesticks that often suggest a period of consolidation or indecision in the market.

For example, if moving average breakout happens in a bearish direction then inside breakout must happen in a bearish direction. The inside bar pattern is neither a bullish pattern nor a bearish pattern. Breakout of inside bar candlestick decides the future direction of the market.

Depending on the close, the bar could represent indecision, trend, or a reversal within the market. An Inside Bar is a two-candlestick pattern in which the range of the second candle (high to low) is completely encompassed by the range of the previous candle. No, the colour of the inside bar candle does not make any difference.

Note that this pair was in a strong uptrend leading up to both setups. This is the kind of momentum you want to look for when trading this strategy. This is because the lower time frames are influenced by “noise” and therefore might produce false signals. The first and the most important characteristic is, the time frame you use to set up the inside bar is extremely important.

Consider going long in the direction of the Outside Bar’s closing. 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. Its relative position can be at the top, the middle or the bottom of the prior bar. Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances.

Fibonacci retracement levels

RSI, MAs, SMAs and EMA as well as more advanced indicators such as Bollinger Bands can help you gather as much insight and data as possible. A bullish Inside Bar can show that the buyers have a slight upper hand, whereas a bearish Inside Bar can show that the balance is skewed slightly towards the sellers. What if you could go into any situation with tons of information? When they do this, they create a secondary pattern known as the hikakke pattern, which is even a stronger confirmation that the trade would move as anticipated. Many traders place their stop loss just above or below the high of the mother bar, but this is dangerous because the stop can easily be taken out before the trade can progress. So, a buying signal is given once the third candle closes above the previous bar.

Traders and analysts can find value in identifying the setup as it can provide insights into potential future price movements. In this article, we will explore different examples of this formation on price charts and discuss how to interpret their signals for trading purposes. The inside bar candle pattern is one of the most frequently occurring chart patterns in financial markets. It is called an inside bar because the first candle completely covers the second candle, which is a chart formation that helps traders predict the next price movement. The Inside Bar can be used in a reversal or trend-following trading strategies. However, it may not be sensible to rely too much on this pattern alone as it can give false signals.

• Price action trading with candlesticks gives a straightforward explanation of the subject by example.
• Generally, although the inside bar is a two-candle pattern, the next candle after the second is a crucial one.
• Even when trading this price action signal in the direction of the trend, it’s not advisable to trade it as a stand-alone signal.
• It does not matter if the Inside Bar is bullish or bearish, all that matters is where the Inside Bar prints relative to existing price action.

It’s crucial to exercise caution and be mindful of false signals that can occur. Traders try to adapt their trading strategies accordingly to improve their chances of success. To develop your own trading strategy with this pattern, you can open an FXOpen account. Most of the time, when seen in a downtrend or uptrend, it is considered a trend continuation pattern. Below is a great example of a bullish inside bar pattern that formed on the Hindustan Unilever daily time frame.

Inside Bar Candlestick Pattern trading strategy

DailyFX Limited is not responsible for any trading decisions taken by persons not intended to view this material. In a downtrend, the moving average indicator, especially the longer-period moving average, can act as a dynamic resistance level. When trading the Japanese candlestick patterns, the moving average indicator can be quite useful. Looking for this price action signal around a resistance level and trying to trade against the trend direction could be disastrous. The bearish harami denotes a drop of upward momentum and potentially a change in bullish sentiment.

The best inside bar setups form just after a breakout from a preceding pattern. In a trend, the consolidation is triggered when longs decide to begin taking profits (selling). Generally, the longer the time frame, the better the signals the inside bar pattern provides.

Inside bar with bearish significance

In both of these the recovery is short lived because the bearish trend does resume again. That means on the daily chart you’re less likely to see big gaps between candle openings and closings as you are with stock charts. In trading, effective entry and exit strategies can be very effective, and the Inside Bar pattern provides valuable insights for both. So use with caution and always in conjunction with other technical analysis tools including RSI, MA or EMAs to gauge the high and low range, volume and momentum. This could signify the establishment of a new market equilibrium. When range trading, a market must be in a sideways trend, the initial approach is to wait until the Inside Bar pattern emerges.

Is an Inside Bar bullish or bearish?

The pivotal moment happens with the emergence of the third candlestick of the Inside Bar chart pattern, surpassing the second candle and signalling a potential uptick in the price. As mentioned above, when trading the Inside Bar chart pattern you need to look for the mother bar or candle, followed by the smaller candle, called the baby bar. There is a dizzying amount of indicators, chart patterns…even types of charts. Even if you’re a day trader, use the patterns that occur on the higher timeframe to make your decision and then step down to your intraday timeframes to time your entry. Trading involves risk and can result in the loss of your investment. All information on this site is for informational purposes only and is not trading, investment, tax or health advice.

important characteristics to know about the Inside bar setup pattern:-

No pattern is the holy grail of trading, and the inside bar pattern, like many other classical chart patterns, has strengths and weaknesses. As for stop loss, an order could be placed at the lowest price level of the mother candle or at the lowest level of the previous price swing (as shown in the chart). Finally, take profit is placed at the highest level of the last swing price. Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading!

Please be mindful, however, that there is a possibility of a false breakout in this case. Traders could also wait for the candle to close, but this comes with the risk of missing a big inside bar candlestick move in the market. Our suggestion would be to find whichever method works best for you. Most importantly, successful trading involves much more than recognizing a single pattern.