The inside bar is a two-candlestick pattern that signals trend continuation or reversal. The first candle of the pattern is usually large, called the mother candle, while the next candle is a small candle having low wicks, and is called the baby candle. In another case, when the mother bar does not appear, it’s also called the abandoned baby candle pattern.
So, traders should wait for the closing of the second candle and validate the inside bar candle pattern. In the above GBPUSD H4, the market is already in an existing uptrend with higher highs and lower lows. You can easily identify the 2 candle inside bar trading pattern during the uptrend. So, the consolidation could potentially due to the pause in the current uptrend.
Advantages and Disadvantages of Inside Bar Trading
An inside bar illustrates that consolidation has taken place over the course of an entire trading day, which signals that the shrinking range is due to expand and become more volatile. The bullish inside bar setups above formed on the USDJPY daily time frame. 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. Don’t forget to
monitor trends and support/resistance levels to distinguish the continuation
inside bars from potential reversal ones/fakeys.
The first example is what you want to look for while the second is what you should avoid. In fact, trading with the trend is the only way to trade an inside bar setup. As you know, I’m a huge advocate of trading from the higher time frames as they tend to cancel out most of the noise from scheduled and unscheduled news events.
When you discover an inside bar breakout on the chart, you will most likely want to trade in the direction of the breakout. The price action might reverse direction and quite possibly could break the range of the pattern from the opposite side. This will trigger your stop loss, because it should be located on that side of the range. Therefore, you will be stopped out of the position with a small loss. The inside bar is a two bar candlestick pattern, which indicates price consolidation.
How to Identify the Inside Bar Candlestick Chart Pattern in Forex Trading?
Another simple price action strategy is looking to take advantage of an impulsive candlestick. While there is a certain amount of flexibility in defining what an impulsive candlestick is, I look at it as a candlestick that is much bigger than any of the preceding three candlesticks. This shows that there is an impulsive move in one direction or the other, and therefore momentum is increasing. This can be unclear, as traders will use it to mean different things. The reality is that price action must be looked at in parts, and it is often a part of a bigger trading system that successful traders will use. This makes it worth learning, so read on to discover what price action trading is and how you can use it profitably.
It’s wise to pick
up a trade signal provided by a fakey if it forms near an important
support/resistance level. All of this shows
that the preceding trend is still strong and hence likely to continue, so an
entry in its direction will pay off nicely. Stop loss orders are usually placed
at the opposite end of the mother bar or around its middle if the mother bar is
bigger than average. If looking to enter this trade you could set your entry for when price breaks out higher and the pattern is confirmed. For example; if price has been trending higher, then looking for a double inside bar breakout higher would be the higher probability play. The double inside bar pattern is a candlestick pattern very similar to the inside bar.
But to capitalize on this breakout potential, you need to identify whether the breakout is likely to result in price appreciation or depreciation. In my experience, the smaller the inside bar is relative to the mother bar, the greater your chances are of experiencing a profitable trade setup. Ideally, we want to see the inside bar form within the upper or lower half of the mother bar. Notice how the bullish inside bar above formed after USDCAD broke out from multi-week consolidation. This period of consolidation allowed the market to “reset”, or shake out profit takers and attract new buyers for the next leg up.
Trading the Inside Bar Candlestick Pattern
Again, this assumes that you are placing your stop loss above the high of the inside bar rather than the high of the mother bar. A favorable risk to reward ratio is needed for any setup taken here at Daily Price Action. This is true whether we’re trading an inside bar, pin bar or wedge breakout. Each and every strategy needs to be accompanied by a favorable risk to reward ratio.
- 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.
- If the last bar has the smallest bar range within the sequence, it is an NR7 pattern.
- First, find an inside bar pattern at the break of support zone using the inside bar indicator.
Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. However, it isn’t a setup that occurs often, at least not in a favorable context.
Professional Trader, Author & Coach
When the price action completes an inside candle on the chart, you should mark the low and high of the Inside Bar consolidation range. Since the Inside candle on the chart is a sign of a consolidating market, we can draw a horizontal support and resistance level around this range in anticipation of a future breakout. When the price exits the inside bar range, we expect that the price action will continue to move in the direction of the inside bar breakout. They often provide a low-risk place to enter a trade or a logical exit point. In the image you will see next, we see an example of inside bars that formed as a continuation signals and then one that formed as a turning point signal.
In this next section we will take a closer look at the Hikkake pattern, which is an inside bar fakeout. When you see this pattern, you should position yourself in the market to trade in the opposite direction to the one which you had previously placed. Also take note of the three blue arrows at the left side of the image, which shows that the previous three candles on the chart are actually bigger than the inside candle. Therefore, we confirm that the inside candle is also the narrowest range day of the last 4 daily sessions. The same is in force for bearish breakout of the inside range, but in the opposite direction. In this case you could sell the Forex pair and you put a stop loss right above the upper candlewick of the inside bar.
However, learning to apply these studies correctly, or at least correctly enough to be profitable, is something that takes practice for most traders. For this reason, if you do inside bar forex not feel comfortable with any of these indicators or studies, do not use them. A daily chart inside bar will look like a ‘triangle’ on a 1 hour or 30 minute chart time frame.
It may also be known as “inside bars.” Inside days may indicate consolidation or lower price volatility. The next stop placement is typically used on inside bars with larger mother bars. As the name implies, an inside bar forms inside of a large candle called a mother bar.
Examples of Inside Days
The markets are based upon probabilities and not certainties, so one cannot simply suggest that every time a setup comes along, it will automatically be profitable. However, there are price action setups that generally swing the odds to your favor. A trend line is also a major tool a lot of traders will use, as over the longer-term traders tend to pay close attention to them. Furthermore, when price breaks through those trendlines, this can be a clue as well.
If the last bar has the smallest bar range within the sequence, it is an NR7 pattern. A clear rejection of a downward thrust is a bullish reversal, and a clear rejection of an upthrust is a bearish reversal. The bullish variant consists of a strong bearish bar followed by a bullish bar. A bearish exhaustion bar opens with a gap up before moving down to close as a bearish bar.