Candlestick patterns are tools in technical analysis that many day traders and swing traders use to determine the future price movement of a stock. Traders can incorporate these patterns into their overall trading strategy. One of the easiest candlestick patterns to identify on a stock chart is the inside bar candlestick pattern.
This article discusses the topic of inside bars and delves into ways that you can incorporate this pattern into your trading strategy and plan.
Inside Bar Candlestick Pattern Definition
To understand inside bars, let’s look at candle formations first. A standard candlestick comprises a body that includes a high, low, an open price, and a close price.
Here are what these components of the candle signify:
- The high represents the highest price reached during the candle’s formation.
- The low of the candle is the lowest price reached.
- The open price means the price when that candle first started and depends on the chart’s timeframe.
- The close price was the last price when the candle formation ended.
Please note that the open and close places on the candle differ depending on whether the candle is a bullish (green) candle vs. a bearish (red) candle. See the examples below of bullish and bearish candlesticks.
Candlestick patterns consider a combination of many candlestick bars (like 2, 3, or 4 candle bars). However, the inside bar candlestick pattern is formed from a two-candlestick pattern. It involves analyzing the current candlestick bar with the previous bar that was created (i.e. the mother bar). The current bar must close and then be compared to the previous candle.
The inside bar pattern requires the current candlestick’s entire body to be within the previous candle’s body.
In other words, the high of the inside bar candlestick is lower than the high of the prior candle –and- the low of the current candlestick is higher than the previous candle’s low. Both criteria must be met to identify the bar as an inside bar.
See the example of an inside bar below.
Inside Bar Candlestick Pattern Characteristics
Okay, the above sounds simple enough to identify. Right? Here are some characteristics of inside bars to also consider:
#1 – Forms on Any Chart Time Frame
Inside bars can be identified on any chart time frame, including the 1-minute, 1-hour, daily, weekly, or monthly time frame. Thus, you can incorporate inside bars in your trading strategy if you want to swing trade on a higher chart timeframe or day trade on a lower chart timeframe.
#2 – Available for all markets
As long as you have access to a candlestick chart, inside bars can be found for any market, including the stock market (NYSE), forex currency market, or future commodities markets.
#3 – Open and Close Prices Are Not Important
The inside bar pattern does not consider the candlestick bars’ open or close price. However, its focus is on the high and low of the current candle compared to the prior candle.
#4 – Wicks Are Fine
It is perfectly okay that there are candle wicks on the current candle and the preceding bar (i.e. the mother bar), as these are used to determine the high and low of the candlesticks.
#5 – Doji Candles Are Also Okay
Doji candles can also be identified as inside bar candles as long as their high is less than the last candle and their low is higher than the previous candle.
#6 – Can Be a Bullish or Bearish Bar
An inside bar can either be bullish or bearish. It also does not matter if the last candle (i.e. mother bar) was bullish or bearish when identifying an inside bar.
#7 – Opposite of the Engulfing Candle
Take the opposite of the engulfing candlestick pattern, and you have an inside bar pattern. The inside bar is opposite the engulfing candle as the inside bar is within the last candle, whereas the engulfing candle completely overshadows the previous candle.
#8 – Looks at the Current Price
Inside bars are not technical indicators that are calculated based on past price action. They also do not lag behind price. They look at the current price action on a chart to indicate where the price might go.
#9 – Signals A Break or A Pause
From a market structure perspective, an inside bar candle can signal that the trend for the stock is taking a pause or break before either deciding to continue to move with the current trend or to reverse in the opposite direction. It also means that both the buyers failed to push the candle to the prior high, and the sellers failed to move it to the previous low point.
Trading Inside Bars
Now that you have identified an inside bar on a chart, let’s focus on the most common way they can be traded.
Strategy: Inside Bar Candlestick Pattern Setup
The primary strategy used by day and swing traders is to look for a breakout of the inside bars high or low and enter a trade in that direction. See the chart below. For the inside bar trade, wait for the price to break either the high or the low.
If the price broke the high, you could look to enter a long position, and if the price went to the downside, you might look for a short entry. Many traders who trade this strategy will have pending orders ready based on the direction the market decides to move.
The example below indicates going short at the break of the low of the inside bar.
However, one thing to consider with this inside bar setup is to ensure that you are trading with the trend to avoid a false breakout to the upside or downside. With trend trading, you will have more confidence in the trade working out in your favor.
In terms of where to take profits, here are a couple of places to consider:
Profit Target: Prior Bars High or Low
One place to exit the trade is the high or low point of the prior bar. For instance, if looking to go long when the price breaks the high of the inside bar, then the first profit point could be the high of the prior bar’s candle (the mother bar candle).
This strategy would also work in the other direction for a short position. See the example below. Of course, this strategy’s feasibility depends on the range between the high or low of the inside bar compared to the prior bar. The example below indicates going short at the break of the low of the inside bar.
Stop losses can be set at the low of the inside bar if going long -or- the high of the inside bar if going short. The example below shows the stop loss placement for the prior trade.
Profit Target: Next level of Support and Resistance
Another place to take profits would be at the next support or resistance level for the traded timeframe.
Summary: Inside Bar Candlestick Pattern
Inside bars are another tool you want to place in your trading arsenal to assist you in formulating a strategy that will work for you. Although our day trading strategy does not look for the inside bar candle pattern to determine where to place trades, many traders have found them to be a consistent strategy.
Are you interested in learning more about our profitable trading strategy? Our simplified approach to day trading teaches you how to read the price chart and to allow the price action to tell you what will happen next.
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