The inside bar candlestick pattern
The inside bar candlestick pattern is one of the most potent chart setups that professional traders lookout; however, most traders fail to
trade it successfully. Lack of skills and knowledge and poor education are the primary reasons why most price action traders don’t make money trading this Japanese
candlestick.
Tips for Trading the Inside Bar Pattern
- Use the Inside Bar pattern in conjunction with other technical analysis tools such as trendlines, support and resistance levels, and indicators to confirm the direction of the trend and increase the probability of a successful trade.
- Pay attention to the size of the Inside Bar compared to the mother bar. If the Inside Bar is too small, it may not indicate a strong trend reversal or continuation.
- Always use proper risk management techniques such as setting stop losses and taking profits to protect your trading account.
- Avoid trading the Inside Bar pattern in choppy or volatile markets, as it may result in false breakouts and losses.
What is an inside bar candlestick pattern?
An inside bar is two candlesticks, the first one is called the mother candle, it is big and large, and the second one is smaller and it is located inside of the mother bar
The illustration above shows inside bars at the tops and at the bottoms, as you can see, the second small bar is completely contained by the first one
which is the opposite of the engulfing bar pattern. The inside bar is seen as a reversal pattern because it indicates that
the market trend is likely to change especially when it is located at the tops or bottoms. It is also considered a continuation signal in strong trending
markets.
According to Thomas Bulkowski, a successful investor, and trader with over thirty years of market experience:
A bearish inside bar pattern in a bull market can indicate a bearish reversal in about 65% of the time. And in a bull market, it represents a bullish continuation signal in about 52% of the time. And a bullish abandoned baby as he calls it is considered a bullish reversal pattern 70% of the time in bull markets, and 55% in bear
market
The psychology behind the pattern formation
The inside bar formation indicates a period of consolidation, in the case of a bullish trend, it reflects that the bulls are not buying any further on
the second day, it is represented by a small black candle on the second day, after a strong uptrend.
And in case of a bearish trend, it means that sellers are not in control of the market anymore, it is reflected by a small white candle after a
strong downtrend. Your understanding of the psychology behind this pattern will help you better identify major turning points in the market, and time correctly your entry and exit.
How to trade the inside bar candlestick patterns
The inside bar can be traded successfully in trending markets particularly if the market is moving strongly. Because the formation of this price pattern provides you with a great opportunity to join the big move. This strategy is very simple, you have to identify a strong trend, and wait for the formation of an inside bar pattern in line with the direction of the market. The formation of this pattern indicates that the market pauses before making its next move; this will allow you to enter the market in the right time and make big profits.
See the illustration below to learn more:
As it is illustrated above, the market is trending down; the formation of inside bar patterns gave us three opportunities to join the trend.
If you are used to our trading approach, you will only look for selling opportunities, this way, you are not fighting big institutions and central banks, you are just trading inthe direction that is favored by the market.
You can place a sell order after the breakout of the pattern as it is mentioned in the chart above, and your stop loss order should be placed above the mother candle. Your profit target is the next support level.
See another example below:
From the above chart, we can see how this price action setup work significantly as a continuation pattern, to be honest, you are not going to take all these signals into considerations. You have to look for significant patterns that form in specific areas inthe market such as support and resistance, Fibonacci retracement levels, moving averages, or pivot points. Using 21 SMA and 8SMA as dinamyc suport or resistance also helps.
How to trade the inside bar breakout with support and resistance
Technical analysis can be very complicated if you don’t focus on the most important basics, such as support and resistance levels. These areas represent a psychological level where the game is played between buyers and sellers, let me give you an example:
If sellers overcome buyers they will push the price below the support level. Some buyers will feel afraid to lose money, because they see that the support level is broken so, they will get out, and sell the market again to cover their loss. Other participants will notice that sellers are in control of the market, they will decide to sell the market and help the bears push the price togo down. As a trader, if you have enough knowledge about support and resistance levels, when you open your chart, you will notice that the
support level is broken, and the bears are in control of the market, this is a good selling opportunity right? But the question is, what is the right time to enter the market?
The inside bar pattern is one of the most reliable price action signal that will give you the right time to enter the market and make big profits. Once you understand how to use it in combination with these levels, you will get clearly what the market is telling you, and you will make good trading decisions.
See the chart below:
The illustration below shows how sellers broke the support level, the formation of the inside bar pattern after the breakout of this level signals indecision in the market.
Right now, no one knows if the support level is really broken, if you sell at market immediately after the breakout of this level, you are making an aggressive entry, which is little tricky and dangerous, because the breakout is not confirmed.
But if you are used with trading inside bars and you understand the psychology behind their formations, you will know that the safest entry should be after the breakout of this pattern. The breakout of this candlestick pattern is a clear confirmation that the market is not still in an indecision period, and sellers are obviously
in control of the market. See another example:
The chart above shows how the market participants interact with these levels, and how the resistance level acts as barrier. The market has had difficulty rising above; this horizontal level prevents buyers twice from rising any further. But in the third attempt, buyers broke through the resistance level.
What is interesting is what happened after the breakout, look at thechart again, you will notice that there is a clear inside bar pattern formed over there.
The formation of this price action pattern indicates that the breakout is not yet confirmed, remember, an inside bar formation means indecision and hesitation. So, you have to be careful, and bear in mind that a false breakout scenario is possible. What will make a difference between you and other traders is your deep understanding of how this pattern works, in this chart above, you will know that the best time to place a buy order should be after the breakout of the inside bar pattern not after the breakout of the horizontal level.
Tips on trading the inside bar price action setups
1-Trade the bigger time frames
I’m not against trading lower time frames, you can trade this setup on 5 minutes time frame using other technical indicators to filter your signals and take just high probability setups.
But you have to be an experienced trader, if you are beginner i recommend you to stick with trading this signal in bigger time frames such the daily and the 4-hour time frame.
Trading this setup on lower time frame will increase your chance to overtrade the market and take low probability price action signals. And this is the quickest way to blow up your trading account.
If you focus just on bigger time frames, this will allow you to set and forget your trade instead of being emotionally controlled by the
market.
2- Trade the dominant trend
You should start trading inside bars in line with the direction of the market, especially in a strong bullish or bearish trend, but don’t never try to trade it against the trend if you are a newbie.
When you feel like you master trading this pattern with the trend, you can move to trade range bound markets, and counter trends.
3- Trade only from key levels
Remember that not all inside bars are worth your hard-earned money; there are specific locations where this setup works great, so make sure that your signal is located in a key level in the market.
4- Find different factors of confluence
Trading with confluence means combining different signals to make the best trading decision. To trade using this concept you need to look for a point in the market
where two or more levels are coming together and wait for an obvious signal to form.
This trading method will give you confidence in your trading approach and it will allow you to avoid over-trading
How to trade the false breakout of the inside bar candlestick
pattern?
Banks and financial institutions know how we trade the market, they know how we think, and where we put our stop losses and profit targets, this is the reason why they could easily take money from us.
One of the most famous strategies that big players use to take money from novice traders is called stop loss hunting strategy.
This strategy consists of driving prices to a certain level where there are massive stop loss orders, and the purpose is to create liquidity, because without liquidity, the market will not move.
Once stop losses are hunt, the market goes strongly in the predicted direction.
The interaction between big participants and novice traders create repetitive patterns in the market, one of the most important candlestick pattern that illustrates how big financial institutions manipulate the market is the inside bar false breakout pattern. Your understanding of this repetitive setup and your ability to detect
it on your charts will help you better exploit it to make money instead of being a victim of market makers and banks manipulations.
This price action signal is formed when price breaks out from the inside bar pattern and then quickly reverses to close within the range of themother bar.
See the illustration below:
As you can see, there are two types of this price action pattern:
A bullish inside bar false breakout that forms when the market is trending down and it is also considered as a bullish reversal signal when it is formed near a key support or resistance level.
A bearish inside bar false breakout that occurs in a bullish trend and itis seen as a bearish reversal pattern when it is found near an important
level in the market. This setup can be considered as a continuation pattern if it is traded with the trend.
Inside Bars false breakouts trading examples
The most important levels that traders should look for to trade this signal are the following:
–Support and resistance levels Video HERE
-Supply an demand areas Video HERE
–Fibonacci retracement levels, particularly, the 50% and 61% ( vide0 HERE )
retracement levels.
–21 moving averages and trend lines in trending markets
–Horizontal levels in range-bound markets
Here is an example of how to trade inside bar false breakout in a
trending market:
As you see in the chart above, the market was trending down, that indicates that sellers are in control of the market, so if you decide tosell the market near the resistance level, all probabilities will be in your favor.
But the question is when to enter the market? And where to put my stop loss?
If you enter the market aggressively before the breakout of the mother candle, and you put your stop loss above it, the market will take your stop loss and go in the predicted direction.
See the illustration below
As illustrated above, big players hunt novice traders stops before pushing the market to go down, if your stop loss was near the resistance level, you would be out as well, if you don’t understand the reason why, it is simply because you were a victim of big players hunting stop strategy
If you are familiar with trading the inside bar false breakout, you will understand what happened in the market, and you will simply take advantage of this manipulation instead of being trapped by the market. See the example below:
As it is illustrated above, the inside bar false breakout gave us a good selling opportunity. If you are able to identify this setup, and you understand thepsychology behind it, there should be no reason not to get into the position.
Trading inside bar false breakouts with Fibonacci retracements
video HERE
What you have to know is that in an uptrend or a downtrend, the market creates impulsive moves and pullbacks.
The Fibonacci retracement helps us highlight the most important pullbacks levels in the market. The best Fibonacci retracement levels that i personally use are the
50% and 61% levels, according to my experience these levels are the most important areas that experienced trader watch in their charts.
Our strategy is simple, we select the technical tool on our chart, and if the market moves strongly, we wait for retracements, if the pullback reaches 50% or 61 % levels, we need just a price action signal to confirm our entry. See the example below:
By adding this technical trading tool to your strategy, you will be able to identify potential trade set-ups in the market, if you analyzed the chart above without using it, you wouldn’t know the reason why the market dropped after the pullback.
Fibonacci tool can be used to trade the pin bar, the inside bar and the engulfing bar setup as it was discussed in pervious sections. The trade above is very profitable because there are lots of factors of confluence that encourage us to place a sell order.
The first reason is the trend, it is obviously down, the second reason is the key Fibonacci ratios that represent a resistance level, and the third one is the inside bar false breakout. One signal is not quite enough to make a good trading decision, you have to look for multiple triggers that support your analysis, this way,
you will put the odds of success in your favor.
Look at another potential trade below:
As you can see, the price moved higher, pulled back to reach our key ratios, and then continue higher. The formation of the inside bar false breakout in this area indicates that the pullback has finished and another strong move will take place.
Conclusion
The Inside Bar candlestick pattern is a simple yet effective price action pattern that can be used to identify potential trend reversals or continuations. Trading the Inside Bar pattern can be a profitable strategy when used correctly. Traders can wait for a breakout of the mother bar or the inside bar to enter a trade, and use proper risk management techniques to protect their trading account. By incorporating the Inside Bar pattern into their trading strategy and using it in conjunction with other technical analysis tools, traders can increase their probability of success in the market.
Credit to the author Munehisa Homma for the book Candlestick Trading Bible – which can be found HERE
