The inside bar candlestick pattern is one of the most powerful chart setup that professional traders look out; however, most traders fail to trade it successfully.
Lack of skills and knowledge and poor education are the major reasons why most price action traders don’t make money trading this Japanese candlestick.
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 tops and at 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 tops or bottoms.
It is also considered as 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 indicates 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 call it, is considered a bullish reversal pattern 70% of the time in bull markets, and 55% in bear markets.
The psychology behind the pattern formation
The inside bar formation indicates a period of consolidation, in 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 any more, 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 in the 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 in the market such as support and resistance, Fibonacci retracement levels, moving averages, or pivot points.
Don’t worry about that, because we will learn about the important trading tools that we will need to use in combination with inside bar setups to make the best trading decisions.