Inside Bar is two candlestick pattern. It has Mother bar as first candle and Inside bar as the second candle. It is one of the basic and very strong candlestick patterns if traded it with some additions. It is not like Hammer or Shooting star or engulfing pattern which requires prior trend. You can trade using inside bar when it is in trend or you can trade it near or after reversal also.
In the above figure of Inside bar pattern, the high of the Inside bar is lower than the high of Mother bar and low of the Inside bar is higher than the mother bar. Here this pattern indicates that bulls were unable to take price higher than previous high and bears were unable to take price lower than previous mother bar.
The Inside bar indicates the temporary pause or balanced between bulls and bears which results in the consolidation. When it is in trend it can indicate the trend is over or the trend is taking pause/retesting before starting a further rally/drop.
Psychology Behind the Pattern –
Understanding the sentiments in the formation of an Inside bar will make your pattern identification easier. Like other candlestick patterns Inside bar also will help us to identify the possible change in the mindset of a trader. Inside bar shows neither bulls or bears in charge to move the stock up or down. There may be some support & resistance levels or any upcoming event that may move stock or it may indicate a trend reversal.
Suppose if you take any long or short position and the stock is started making higher highs or lower lows to its previous candles and suddenly if the stock opens any gap up or gap down in the next day and started making small candles then we will become more cautious and try to book our positions. But these small candles can also be an Inside bar and indicates loss of momentum or bulls/bears may be exhausted to take stock further up or down.
If you can identify the period of expansion and consolidation it will be helpful to trade according to it. Using this you may filter out bad trades. If you compare this condition with previous conditions by checking the historical performance of the stock you can filter out bad trades and can ride explosive moves.
The Inside bar on the Higher time frames can have different patterns in the Lower timeframes like triangle breakout, wedges or range breakout. Below are the few examples to help you to understand what exactly happens in Smaller/Lower timeframes when Inside bar appears in Higher time frames.
The above chart is an hourly chart, the stock started correcting after the event of Auto sales number. This stock posted the poor results than the previous results of its own. From the above chat we can see after forming inside bar, Stock started falling sharply and continuing the same pattern.
The chart of the same stock in a smaller or lower timeframe, it formed a Triangle pattern before giving a breakout and after that, we can see a sharp fall happened.
In the next part, I will cover how to take a position based on inside bar and different trading strategies based on inside bar.
The information is for educational purposes only and does not constitute an offer to sell nor a solicitation of an offer to buy any security which may be referenced by me. The information provided through my charts is for personal, non-commercial, educational use and display.