What is an Inside Bar in Trading?

If you’re new to trading, you may have heard the term “inside bar” thrown around.

But what exactly is an inside bar, and why is it important? In this article, we’ll dive into the world of inside bars and explore their characteristics, types, and how to trade them effectively.

Characteristics of an Inside Bar

An inside bar is a candlestick pattern that forms when the high and low of the current bar are inside the high and low of the previous bar. In other words, the entire inside bar is contained within the range of the previous bar.

This pattern indicates a period of consolidation or indecision in the market, as traders are taking a break from the previous trend.

One of the key characteristics of an inside bar is its size. Inside bars are typically smaller than the previous bar, indicating that there is less volatility and momentum in the market.

Additionally, the wicks or shadows of an inside bar should be contained within the range of the previous bar, indicating that the market did not break out of the previous range.

Types of Inside Bars

There are two main types of inside bars: the bullish inside bar and the bearish inside bar. A bullish inside bar occurs when the current bar’s high and low are inside the previous bar’s high and low, and the current bar’s close is higher than the previous bar’s close.

This pattern suggests that buyers are taking control of the market and that a bullish trend may be forming.

On the other hand, a bearish inside bar occurs when the current bar’s high and low are inside the previous bar’s high and low, and the current bar’s close is lower than the previous bar’s close.

This pattern suggests that sellers are taking control of the market and that a bearish trend may be forming.

Importance of Inside Bars in Trading

Inside bars are important in trading because they provide valuable information about market sentiment and can indicate potential trend reversals.

When an inside bar forms after a strong trend, it suggests that traders are taking a break and that the trend may be losing momentum. This could be a signal to exit a trade or to take profits.

On the other hand, when an inside bar forms after a period of consolidation, it suggests that traders are deciding on the direction of the market. This could be a signal to enter a trade when the market breaks out of the inside bar’s range.

How to Trade Inside Bars

Trading inside bars can be done in a variety of ways, but the most common approach is to wait for the market to break out of the inside bar’s range. This breakout can be either bullish or bearish, depending on the type of inside bar that formed.

When trading inside bars, it’s important to look for additional confirmation signals, such as a bullish or bearish divergence on an oscillator or a trendline breakout. This can increase the probability of a successful trade and reduce the risk of a false breakout.

Common Inside Bar Trading Strategies

There are several common inside bar trading strategies that traders use to enter and exit trades.

One popular strategy is the inside bar breakout strategy, which involves waiting for the market to break out of the inside bar’s range and entering a trade in the direction of the breakout.

Another strategy is the inside bar reversal strategy, which involves waiting for an inside bar to form after a strong trend and then entering a trade in the opposite direction of the trend when the market breaks out of the inside bar’s range.

Inside Bars vs. Outside Bars

Inside bars are often compared to outside bars, which are candlestick patterns that form when the high and low of the current bar exceed the high and low of the previous bar.

Outside bars indicate a period of high volatility and momentum in the market, while inside bars indicate a period of consolidation.

While outside bars can also provide valuable information about market sentiment, they are generally considered to be more difficult to trade due to their higher volatility and greater risk of false breakouts.

Examples of Inside Bar Trades

Let’s take a look at a few examples of inside bar trades in action. In the first example, we have a bullish inside bar that forms after a period of consolidation.

We can see that the market breaks out of the inside bar’s range, indicating a potential bullish trend. A trader could enter a long position when the market breaks out of the inside bar’s range, with a stop loss below the inside bar’s low.

In the second example, we have a bearish inside bar that forms after a strong uptrend. We can see that the market breaks out of the inside bar’s range, indicating a potential trend reversal.

A trader could enter a short position when the market breaks out of the inside bar’s range, with a stop loss above the inside bar’s high.

Read: Ultimate Guide On What Is Price Action Trading Strategy

Conclusion

Inside bars are a common candlestick pattern in trading that can provide valuable information about market sentiment and potential trend reversals. By understanding the characteristics of inside bars, the different types, and how to trade them effectively, traders can improve their trading strategies and increase their chances of success.

If you’re interested in learning more about trading and how to use inside bars to your advantage, be sure to check out our other educational resources and trading courses. Happy trading!