Inside Bar Candle: Know Everything About It

30 Apr 2022  Read 1062 Views

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Haven't we been emphasizing on investing, rather than trading? But no, karna hume trading hi hai!

Whenever you open a stock analysis video, the first thing they would do is open a graph that has red and green bars and read various points on them. If you have been with us for quite some time, you already know a lot about it. But, if you haven't and are as clueless as Taani from 'Rab ne bana di jodi' who had no clue what different and same things (people) look like, you are in the right place. 
Candlestick patterns have been long used in trading. While there are like 35 candlestick patterns that traders have the option of using while analyzing stocks, today we are going to talk about just one, the one that is most common. Let's begin then. 

What is an Inside bar Candle Strategy?

An Inside Bar pattern is a two-bar price action trading approach with the inside bar being smaller and falling within the prior bar's high-low range (popularly known as the mother bar).

Inside Bar Forex Trading Strategy | How To Trade The Inside Bar Pattern

The inside bar's relative location can be found at the bottom, middle, or top of the bar.

Inside bars are one of the most common candlestick patterns used by price action traders to analyse and trade. These are excellent for detecting momentum halts, which can be useful when looking for trade ideas. When price breaks out of the inside bar's range on the next candle, the general indication of an inside bar is delivered.

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How to trade using the inside bar strategy?

1. Selecting the appropriate time frame

The first and most crucial characteristic is that the time frame in which you set up the inside bar is critical. Any time frame lower than the daily chart should be avoided with this method, as it should be avoided in general.

This is due to the fact that lower time frames are influenced by "noise," which may result in erroneous signals. Because the pattern took longer to build, an inside bar that forms in a longer time frame is more "important." This indicates that a larger number of dealers were involved in its creation.

2. Performs exceptionally well in a market that is currently trending.

If you're going to trade an inner bar candlestick pattern, you should always keep an eye out for a market trend. In a choppy or sideways market, this method does not work since you will be easily stopped out. In reality, the only way to trade an inside bar setup is to trade with the trend. It's worth noting that the pair was in a strong uptrend before to both setups. When trading this approach, you want to seek for this kind of momentum.

Inside Bars - How and When to Trade Them | Optimus Futures

3. Pattern Breakout Inside Bar Setup

The best inside bar setups appear shortly after a breakthrough from a previous pattern. The explanation for this is straightforward. Consolidation occurs in a trend when longs decide to start taking profits (selling).

This leads the market to pull back, forcing new buyers to rush in and buy, maintaining high prices. The inside bar pattern can last for days, weeks, or even months until new buyers can outnumber sellers and push the market higher.

Basics of Inside Bar Candle Strategy for Beginners - Traders Ideology

4. Mother candle and inner bar candle sizes

The interior bar's size in comparison to the mother bar is critical. The smaller the inside bar is in relation to the mother bar, the more likely you are to have a profitable trade setting, in my experience.

The inside bar should ideally form within the upper or lower half of the mother bar. If the mother bar's body is weak, trading it in may not be a good idea. The size of the mother bar and the body are quite significant, and if the interior bar is smaller than the mother bar, it can assist you to get much better outcomes.

5. Inside Bar Trade: Entering, Exiting, and Stop Loss

Entering: – Mark the low and high of the Inside Bar consolidation area when the price action completes an inside candlestick chart pattern. These two levels are utilised to signal the start of a possible deal.

Remember that the inner candle gives us information about the ultimate breakout and possibility of a continuation beyond the range in the direction of the break, but not about the direction of the breakout through the range before the actual move. To put it another way, if the price action interrupts the upward range, you should go long. You should trade the short side if the market action breaks the range downwards. Exiting: - With Inside Bar Breakouts, predicting the possible move might be difficult. Because inside bar trades frequently result in a long-term impulse move after the breakout, using a trailing stop loss after the price has moved in your favour is a good trade management method.

Stop Loss: – In either instance (long or short), your stop should be placed below the range's bottom, as shown in the diagram below. There is a 1% buffer below the range that can be used.

 

Traderstewie on Twitter: "INSIDE DAY candle = "From contraction, comes  expansion"! You want to see a very small, mini candle(today's high to low  range is WITHIN the confines of the previous day's

6. The inside bar pattern aids in the detection of trend changes.

The inside bar candlestick pattern is quite useful since it indicates that the market is no longer as bullish or bearish as it was previously. Because we know from experience that market expansion and contraction can only last so long, being able to detect these phases will assist any trader to enhance their odds of finding a good trade. The resulting moves can be explosive when one of those market phases concludes! Inside bar candlestick patterns are useful because they show that the market has constricted and may be set to reverse its present trend.

Tips one should follow

Tip 1: In a sideways market, stay away from within bars. Inside bars are periods of low volume (momentum) trading, and when the broader market is trapped in a low volume sideways rhythm, a trader seeking for inside bars is certain to encounter a lot of 'noise.' When I say noise, I'm referring to price movements that don't quite match what you'd expect when trading them. Choppy market action can make trade management incredibly difficult and risky, compounding your concerns.

The EUR/JPY chart above, for the most part, shows a sideways market. An inner bar (given other conditions) signaling a pause in momentum is a good piece of information when price is normally trending well in a particular direction with decent-sized bars! That takes me to the second point I'd want to make.

Tip 2: Make a Connection to a Bigger Story even while in a trend, pushing triggers on an inner bar without thinking might have disastrous consequences! As I've stated numerous times in previous blogs, it's all about the tale! When you look at the inside bar for what it is - a low volume trading period – you'll see that it might provide you with different information depending on where it appears on the chart. A critical element to remember here is to look past your instinctive desire to find these bars in the first place and instead question yourself: Where on the chart would you like to see traders' interest drop to a reasonable level? Maybe at a retracement to a key former breakthrough point?

An inside bar can appear anywhere, and you don't have to trade it. Putting it in context is typically the key to weeding out the low-probability candidates. It's understandable that price is losing momentum as it approaches such a critical prior support level in the example above. An inside bar just confirms that anticipation, allowing you to profit from a high-probability trade setup by setting price for a highly likely bounce off of that support and resistance level. These types of places are uncommon, and if you can start combining your inside bars with them, you'll have a terrific tool for cherry-picking the best inside bar setups from a sea of them on the chart – utilising good old price action knowledge.

Tip 3: Focus on longer time frames. While it is widely accepted that price action is relevant across all time frames, I will dare disagree when it comes to inside bars. We're actually interested in the order flow/price action components of low volume trade being printed on the charts in the form of inner bars. However, in intra-day markets, traders' interests might be influenced by a variety of factors that are unrelated to technical features of trading. Important upcoming news announcements, which may temporarily prevent traders from executing trades, or the general variation in momentum seen throughout the day as markets around the world go in and out of trading activity, are examples of these situations (Asian sessions are normally weaker than the European and the American sessions).

An inside bar on the daily chart will hold trade activity before and after the day's news announcements, as well as all trading sessions, and is thus more indicative of a genuine dry up of momentum than an inside bar arriving in the middle of the Asian trading day on the 15 minute chart. Of course, we're ignoring the important components of location and the larger story, which can have a significant impact on a trader's decision to trade (or not trade) the inner bar, but we're talking about how intra-day traders are more prone to 'noise' than higher time frame traders. When it comes to often recurring bar patterns like the inner bar, you need to know how to tell the weak ones from the strong ones, or you'll end up as pro fodder!

Conclusion

Inside bars can be a profitable technique to trade stock, commodity, or any other market. After all, it's a setup that's taught as part of the price action course and has proven to be very effective.

However, it's not a common scenario, at least not in a positive light. This is why I don't recommend relying just on the inner bar candlestick pattern to trade the market. As a result, you're limiting your trading possibilities to the point where you're more likely to accept substandard setups. Inside bars should therefore be viewed as a tool within your trading toolkit rather than the toolbox itself. The inside bar setup can generate continuous profits, but only for traders that pay attention to the points mentioned above.

About the Author: Govind Singh | 4 Post(s)

Govind is an enthusiastic Management student, pursuing BBA from Christ University. He's a keen learner with strong academics and a passion for co-curricular activities. He wishes to up-skill himself in the broad domain of finance and business management.

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