Price forms a range and then rockets to the upside to break out over previous resistance. If you study trading breakouts, ones that start at the bottom of the range to break out, usually fail. We like to see basing under resistance for an upside breakout and above support for downside breaks. Our double inside bars are short term consolidations and we can expect that when they break, the odds are they will reach the high or low of the mother bar. Let’s switch to the H1 chart of USD/CAD and examine the first and the last inside bar in the daily time-frame. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools.

Since the current price was above the 200 period simple moving average, then we would anticipate a bullish breakout. A couple of candles later and the price did break above the high of the inside bar pattern. In this market environment, where the trend did not reverse but instead shifted to a sideways movement, means that market sentiment remains uncertain for this trade. As traders, you may have noticed that the two candles in the inside bar pattern often serve as short-term resistance levels. Therefore, breaking these price levels is crucial for the success of a potential long trade in the market.

Using Inside Bar Strategy in Forex Trading

This approach allows for a deeper understanding of buyer and seller dynamics during inside bar breakouts. It forms when two consecutive candles (bars) stay entirely within the range of the previous candle. This suggests even greater market consolidation compared to a single inside bar, indicating strong accumulation or uncertainty among traders. As practice shows, the smaller the size of the inside bar in relation to the mother candle, the better the chance of getting a profitable trading setup. Recall that the inside bar represents a consolidation after a strong trend. Consequently, the denser the consolidation, the more volatile its subsequent breakout will be.

In this section, we answer some of the most common questions traders have about backtesting inside bar strategies. Theoretical calculations show only a modest positive return from trading inside bars. In reality, this could easily turn into losses due to commissions, slippage, and other costs.

Inside Bar Pattern vs. Harami Pattern

An inside bar (2) formed just below the resistance level (1), indicating some temporary indecision among market participants. Traders wait for the price to break out above or below the inside bar, and then enter the trade in that direction, hoping it will lead to a strong trend. The chart on the right is a 15-minute footprint, showing how the bullish breakout at the 53,200 level unfolded.

Volatility is cyclical—a contraction will eventually be followed by an expansion in price, i.e., at some point, the price will break out of an Inside Bar Pattern. Price action analysis will be the key to determining whether the price will break out in the direction of the previous momentum or be a reversal. In fact, trading with the trend is the only way to trade an inside bar setup. As you know, I’m a huge advocate of trading from the higher time frames as they tend to cancel out most of the noise from scheduled and unscheduled news events. In this lesson, we’re going to discuss the five characteristics of a profitable inside bar setup.

The daily chart serves as a natural filter, and there you will find the inside bar trading strategy best price action patterns that will increase your chances of making a profit. A pin bar is a price action strategy that shows rejection of price and indicates a potential reversal is imminent. An inside bar is a price action strategy that shows consolidation and that a potential breakout is imminent.

The Trend is Your (Best) Friend When Trading Inside Patterns

1. This written/visual material is comprised of personal opinions and ideas and may not reflect those of the Company.
2. While that may be true, we are going to focus on the 2 inside bar candlestick pattern and remember, depending on the timeframe, they may have more meaning.
3. However, when you know what to look for, these setups can be quite profitable.
4. It’s crucial to exercise caution and be mindful of false signals that can occur.
5. Here are a few types of bars that you will most likely use when utilizing the InSide Bar Strategy.

Keep expectations in check, taking profits at the second dotted line (potential support level of the mother bar), this was a $9 price move per share. In this double inside bar example, you would have been break even on the trade. The double inside bar strategy takes advantage of a slightly longer term consolidation in the market. A saying that goes “the bigger the brick the bigger the break” describes what we expect for a double inside bar break. A test of the breakout from the consolidation zone formed by the double inside bar (5). When volatility is low, inside bars might form without leading to significant price movement, making trading harder.

1. Keep in mind that we’re talking about the entire range of the candle from high to low, including its shadows.
2. A bearish mother candle is part of a downtrend, while a bullish inner bar candle represents a slight consolidation.
3. Good analysis and following tested trading rules can help avoid these errors.
4. For those unfamiliar, NR4 was a pattern discovered by Tony Crabel that has similar characteristics to the inside bar.
5. We will discuss this further and provide an example in the following sections.
6. The daily chart serves as a natural filter, and there you will find the best price action patterns that will increase your chances of making a profit.
7. Therefore, a trade would anticipate a bearish break below the inside bar pattern.

Similar to the bullish inside bar, the bearish inside bar is not defined by the color of its first or second candle. The ‘bearish’ nature of the inside bar is determined by its position on the chart. This formation can be regarded as a false breakout of the inside bar.

In consolidating markets, however, they may lead to more false signals. However, in terms of significance, they are more similar than many other candlestick patterns. This is because both represent a period of indecision and uncertainty about the direction of the price movement.

It formed after a spike in buying activity, possibly triggered by news during the early European trading session. On the left side of the 4-hour BTC/USD chart, you can see five inside bars marked with arrows. These bars are completely contained within the high and low of the previous bar. If you need more clarity on the market trend, you can place the 20 EMA indicator as a trend guide just as we did on the Meta chart up there.

Or activate the advanced tariff right now to access the full range of functionality. An outside bar is the opposite of an Inside Bar because it has a high and low range that exceeds those of the previous bar. The prior bar, the bar before the inside bar, is often referred to as the “mother bar”. You will sometimes see an inside bar referred to as an “ib” and its mother bar referred to as an “mb”.

This pattern is ideally observed during trending market periods or after a series of consecutive—and often large—decisive moves in a specific direction. Therefore, the relatively smaller move made by the pattern can present viable entry points with more defined risk and upside potential. This strategy is composed of a fakey setup, and it has a higher winning ratio if it is traded with the trend. For example, trendline and support/resistance breakout represents trend continuation.

We’re also a community of traders that support each other on our daily trading journey. Inside bars typically occur after a significant rise or drop in price and indicate a period of indecision before a likely continuation of the previous trend. Thoroughly understanding the pattern is fundamental before diving into backtesting. You can see that buyers were trapped at the top of the previous candle.