In technical analysis you will meet two types of patterns: chart patterns and candlestick patterns. Chart patterns are certain shapes that are formed by price action and tend to repeat over time. Candlestick patterns are only available if you are using Japanese candlesticks as a charting method. Candlesticks are great for understanding market psychology. What’s more, candlestick patterns offer great risk to reward ratios. In this guide we’ll show you how to trade Inside Bar candlestick patterns in detail.
Inside bar definition
An inside bar is a two-bar candlestick pattern that signals a trend continuation or reversal. The first bar is larger than the second bar.
Why is understanding the inside bar important for traders?
- Inside bars are frequently used candlestick patterns in trading
- Understanding Inside Bar in trading can help you better conduct technical analysis
- Inside Bars are a bit complex as they might indicate reversals or continuations, but they offer good risk to reward ratios
- Understanding Inside Bar in trading can be helpful for understanding market psychology.
Inside bar explained in more detail
Inside Bar candlestick patterns consist of two candlesticks. The first candle is larger in size and engulfs the second one. The pattern usually follows sharp market moves and represents a consolidation period.
The pattern might signal trend continuation or a reversal, depending on the breakout direction. The first candle’s High and Low points are working as support and resistance levels. If the price breaks and closes above the first candle’s high, the signal is bullish. If a price breaks the resistance of the first candle’s low, the pattern signals a bearish market. Stop Loss can be placed over or below the second candle, depending on the breakout direction. The Take Profit target is not clear and depends on the strength of the new trend.
To identify an inside bar on the chart, look for a bar that fits this description:
- The high of the new bar is lower than that of the previous bar
- The low of the new bar is higher than that of the previous bar
- The pattern appears in trends
The bar preceding an inside bar is often referred to as ‘mother bar’ and is crucial in identifying support and resistance levels.
Inside bar example in trading
Inside bars can be used as buy or sell signals on the market. In the USD/JPY example, you can see that the Inside Bar pattern appeared on an uptrend. The first bar engulfed the second one. The high and the low of the Mother bar served as support and resistance levels. Once the support trendline got broken and the candle closed below the trendline, we could have entered the trade. Stop Loss order can be placed right above the pattern. However, some traders might choose much smaller stops and place them right above the broken trendline. Profit target depends on the strengths of the new trend. In general, the pattern offers greater than 1:1 risk to reward ratios.
Main takeaways from inside bars
- Inside Bars can signal bearish or bullish moves depending on the breakout direction
- Inside Bars consist of two candles and are important in technical analysis
- The first candle engulfs the second one.
- The bar preceding an Inside Bar is called ‘mother bar’
FAQs on inside bars
What is an inside bar in trading?
An inside bar is a bar on a candlestick chart that shows a consolidation point on the market where neither bullish nor bearish sentiment is prevailing. Inside bars can indicate reversals or continuations that make them complex for some traders.
Are inside bars bullish?
Inside bars are not bullish or bearish candlestick patterns on their own. The pattern appears in trends and represents consolidation. Once the first candle’s (mother candle) high is broken and the new candle closes above the trendline, the signal is bullish. Similarly, when the mother candle’s low is broken and the new candle closes below the low, the signal is bearish.