How to trade the inside bar candlestick pattern: setup, breakout & risk control

What is an inside bar candlestick pattern?

An inside bar is a two-candlestick pattern. It signals a period of market consolidation. The first candle is a large one, called the mother bar. The second candle is smaller. Its entire body and wicks are contained within the high and low of the mother bar. This smaller candle is the inside bar.

The inside bar pattern shows market indecision, as the price isn’t moving much. Buyers and sellers are in a standoff. This calm period often precedes a big move. Traders look for a breakout from this range. The pattern shows a pause in momentum, suggesting that a new trend or a continuation of an old trend is coming up.

How to recognise the inside bar pattern

To understand the inside bar candlestick pattern, you need to know its parts.

The inside bar vs outside bar is an important difference. An outside bar is the opposite of an inside bar. Its high is higher than the previous candle’s high, and its low is lower than the previous candle’s low. It shows a large increase in volatility. An inside bar shows a decrease in volatility.

The inside bar’s candle size is key. It must be smaller than the mother bar. Both its body and its wicks must be inside the mother bar’s range. The wicks are also important. They show the highest and lowest prices. The inside bar’s wicks must not extend beyond the mother bar’s wicks.

The pattern tells you about volatility. It forms when the market’s range shrinks. This quiet period is like a coiled spring. It is building up energy. This energy can be released in a strong breakout.

The difference between bullish/bearish inside bars is often overlooked. Inside bars themselves are neutral patterns. In an uptrend, an inside bar often signals continuation higher; in a downtrend, it can signal continuation lower. Context, such as trend direction and support/resistance, determines whether the setup is bullish or bearish.

Inside bar variations

The basic inside bar has a few variations. Knowing them can help you in your inside bar trading strategy.

Double or multiple inside bars

When two or more inside bars form within the same mother bar, it signals extended consolidation and shrinking volatility. This often means the market is coiling tightly, and the eventual breakout can be stronger than usual.

Three inside up/down

The three inside up/down is a Japanese candlestick reversal pattern that incorporates an inside bar. The first candle is large, the second is an inside bar, and the third closes above (for a bullish setup) or below (for a bearish setup) the first candle. This sequence confirms a potential reversal.

Inside bar with wick rejection

An inside bar that forms with a long wick shows that price attempted to break out of the mother bar’s range but was rejected. This failed breakout attempt suggests the market is not ready to move in that direction and may foreshadow a reversal or stronger move the other way.

Fakey pattern

The fakey occurs when price breaks out of the inside bar range but then quickly snaps back inside the mother bar. This false breakout often traps traders who entered too early, and the real move tends to unfold in the opposite direction.

Hikkake pattern

The hikkake is a specific type of false breakout pattern. Price initially breaks one way, reverses back inside the mother bar’s range, and then extends powerfully in the opposite direction. Traders often treat this as a reliable reversal trigger once the second move is confirmed.

Identifying chart patterns doesn’t guarantee success – market conditions can change, and patterns may sometimes be misread or fail to play out as expected.

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Inside bar vs other candlestick patterns

It’s important to know how to tell the inside bar apart from other candlestick patterns. Here’s how to differentiate:

Inside bar vs engulfing

The inside bar pattern is a small candle inside a large one. An engulfing pattern is a large candle that completely covers the previous one. An engulfing pattern shows a strong shift in momentum. An inside bar shows a pause in momentum.

Inside bar vs doji

A doji has a very small body. Its open and close prices are almost the same. A doji shows high indecision. An inside bar has a body that is contained within the previous bar and can have a larger body than a doji.

Inside bar vs pin bar

A pin bar has a long wick and a small body. It signals a strong price rejection. An inside bar shows a small range and signals a pause.

Here is a simple comparison table:

How to identify valid inside bars

Not all inside bars are tradable. That’s why you need to identify a valid setup to apply your inside bar trading strategy. Follow these rules to confirm a valid inside bar:

Best timeframes to trade

The inside bar is best on higher timeframes. The 4-hour, daily, and weekly charts are best. The signals on these charts are more reliable. Avoid the 1-minute or 5-minute charts. They give too many false signals.

Trading context

The best inside bars form in a trending market. They signal a continuation of a trend. They are less reliable in a ranging market.

Checklist to validate the setup:

Learn more about candlestick patterns and how to recognise them.

How to trade the inside bar pattern

Once you’ve identified a valid inside bar, you can start forming a trading plan. The first step is to look for a potential entry point. The inside bar strategy often focuses on a breakout above or below the mother bar. Some traders set a buy stop order slightly above the mother bar’s high, or a sell stop just below its low, so that an order triggers only if the market breaks out of the range.

You can also use pending orders to automate entry around these levels. This works in a similar way to the breakout method.

It’s common for traders to manage risk by setting a stop-loss order on the opposite side of the breakout. For instance, a stop-loss might sit below the mother bar’s low when opening a buy position, or above its high when opening a sell position. This approach helps define risk before entering a trade, but it doesn’t remove it entirely.

When setting a take-profit level, traders often look at the size of the mother bar or nearby areas of support and resistance.

Before placing any order, it can be useful to check for confirmation from other indicators. Some traders review trading volume — a breakout supported by higher volume can suggest stronger momentum. Trendlines and indicators like the RSI may also help assess whether price movement aligns with broader market direction.

Trading strategies using the inside bar

You can combine the inside bar with other tools. This makes your inside bar forex strategy more powerful.

With support/resistance

Look for an inside bar that forms at a major support or resistance level. This is a very strong setup. It shows a pause at a key level. A breakout from this level can be a major move.

Trend continuation

This is the most common use. You spot a strong trend and then see an inside bar. This signals a small pause. The trend is likely to continue after the pause. You trade in the direction of the trend. This is a strong price action inside bar setup.

Countertrend setups

You can use the inside bar for reversals. Look for an inside bar at the top or bottom of a trend. The fakey setup is a great example of this.

Inside bar + MACD

You can use the MACD to confirm momentum. See if the MACD histogram shows a decrease in momentum and the inside bar forms. Then the MACD shows a new momentum surge. This confirms the breakout.

Inside bar + moving averages

You can look for an inside bar that forms near a moving average. This is a strong combination. It shows that price is consolidating around a key level.

Inside bar + Fibonacci retracement zones

You can use Fibonacci retracement to find entry and exit points. An inside bar that forms at a key Fibonacci level (such as 50% or 61.8%) can be a high-probability trade.

Learn more about different trading strategies before you apply the inside bar trading strategy.

Common mistakes in inside bar trading

Even experienced traders can make mistakes. The only way to avoid them is to know what they are.

A common mistake is misidentifying the pattern. Be sure the inside bar is completely inside the mother bar. Another mistake is trading inside bars in sideways markets. The pattern is less reliable here. It gives many false signals. Stick to trading them in trending markets.

Don’t ignore context and fakeouts. The context is crucial. The pattern on its own is not a guarantee. You must look for confirmation. Be careful of false breakouts (fakeouts).

Lastly, always manage risks. Make sure your potential reward is much bigger than your risk. A popular risk-to-reward ratio is 1:2 or higher.

Advantages and disadvantages of the inside bar trading strategy

The biggest advantage of using the inside bar candlestick pattern is its simplicity. Even new traders can find it. Plus, it offers fast signals in consolidations. This helps you get into a trade early. You do not have to wait for a long trend.

Most importantly, you can use this pattern on any market. It works for stocks, forex, crypto, and commodities.

However, like all other indicators, it has its limitations. For instance, in a sideways, choppy market, the pattern gives many false signals. Also, it requires confirmation. Don’t trade the inside bar on its own. Use other indicators or price action to confirm the signal. And always remember, if technical indicators provide a signal, it’s never guaranteed to result in market moves. Past performance is not a reliable indicator of future results.

Real market examples

Let’s look at some real examples to understand this candlestick pattern better.

For an inside bar forex strategy, let’s take the EUR/USD pair. Imagine you see a strong uptrend on the EUR/USD daily chart. An inside bar forms, and the price consolidates. You can place a buy stop order just above the mother bar’s high. The price then breaks out and continues the uptrend. You can enter the trade and ride the trend.

For crypto trading, let’s use the BTC/USD. Imagine that bitcoin is in a strong downtrend. An inside bar forms after a big red candle. This is a bearish continuation setup. You can place a sell stop order just below the mother bar’s low. The price breaks out and falls quickly, allowing you to gain from your short position.

Now, let’s say you’re trading Apple’s stock, which is in an uptrend. An inside bar forms at a key resistance level. The pattern is a sign of indecision at resistance. The price then breaks out to the upside. This confirms that the uptrend will continue. You can enter a long position.

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