Candlestick patterns provide a wide range of signals — from continuation and reversal to market hesitation. The two-candle inside bar pattern suggests a period of consolidation or indecision in the market. Traders and analysts use this setup as part of a comprehensive strategy. In this article, we will break down the basics of the inside bar pattern, examine examples of this formation on real-market price charts, and discuss how to interpret its signals for trading purposes.

What Is an Inside Bar Candle Pattern?

An inside bar is a two-candlestick formation that appears on a price chart when a candlestick's high and low range is contained within the high and low range of the preceding candle. In other words, the entire price action of one candle is confined within the previous candlestick's price range.

The setup signifies a period of consolidation or indecision in the market; however, it doesn’t identify a trend reversal. The price may continue moving in the prevailing trend or turn around. Also, the pattern may appear in both an uptrend and a downtrend. It indicates that the current candle’s trading range is narrower than that of the previous candlestick. This contraction in price volatility suggests a temporary equilibrium between buyers and sellers.

The inside bar can be observed across different financial instruments such as stocks, cryptocurrencies*, ETFs, indices, and forex currency pairs and can be traded using contracts for difference (CFDs) provided by FXOpen.

Identifying the Inside Bar on Trading Charts

To identify this formation on trading charts, traders follow these steps:

1. Look for two candlesticks: Traders start by identifying two candlesticks that look like the inside bar.
2. Compare the high and low range: After that, they check if the high and low range of the subsequent candle is entirely contained within the high and low range of the preceding candlestick.
3. Confirm the pattern: Once they identify that the subsequent candle meets the criteria, traders confirm it as an inside bar.

Inside Bar vs Outside Bar

The inside candle pattern occurs when the high and low of a candle are contained within the range of the preceding candlestick, indicating consolidation or indecision in the market. It suggests a potential reversal or continuation of the current trend. On the other hand, an outside bar, or engulfing pattern, happens when the high and low of a candlestick completely engulf the previous candle, signalling a potential reversal. A bearish engulfing indicates a bearish reversal, while a bullish engulfing suggests a bullish reversal. Both are widely used by traders for technical analysis and identifying potential trades.

Traders can analyse outside and inside bars on forex, stocks, and other markets using the FXOpen TickTrader platform.

Trading the Inside Bar Pattern

Trading with the inside bar candlestick pattern involves using it as a signal for potential breakouts or continuation of the prevailing trend. Here are the steps traders usually follow when trading with the pattern:

1. Determine the direction of the preceding trend: Traders assess the overall trend leading up to the formation. If it's an uptrend, the preceding candles should be mostly bullish. If it's a downtrend, the prior candles should be mostly bearish.
2. Wait for a breakout: The formation indicates consolidation and potential price compression. Traders often wait for a breakout from the setup's range to initiate a trade. A breakout above the high of the formation suggests a bullish signal, while a breakout below the low indicates a bearish signal.
3. Consider additional confirmation: Many traders wait for 2-3 candlesticks to form in a breakout direction. Also, to avoid false breakouts, traders may look for additional confirmation indicators such as volume analysis, trend tools, or momentum indicators to support their trading decisions. An increasing volume at the breakout or a signal from a trend indicator may provide additional confluence.
4. Set their entry point: Once the price direction is determined, traders may set the entry order above the high of the bullish breakout or below the low of the bearish breakout.
5. Set stop-loss and take-profit orders: Although there are no strict rules, traders typically set stop-loss orders above the bearish and below the bullish pattern, considering the timeframe and the entry point, so they aren’t too wide. For take-profit targets, they consider significant swing points, key support/resistance levels, or a 1:3 risk/reward ratio.  
   

Live Market Example

Below, we provide an example of a bullish inside bar stock pattern on a Tesla chart. Following the inside bar trading strategy, the trader waits for the breakout above the setup marked by a horizontal line. The stop loss is set below the formation’s low, and the take profit is at the next resistance level.

Final Thoughts

While the inside bar pattern can be a useful tool for identifying trend reversals and continuations, it's important not to rely solely on this pattern for your trading decisions. Traders typically combine the formation with technical indicators and utilise risk management tools to build a solid trading strategy.

If you want to develop your own trading strategy, you can use FXOpen’s TickTrader trading platform. If you have a strategy and you would like to trade it across over 700 markets with tight spreads and low commissions, you can consider opening an FXOpen account.

FAQ

Is an Inside Bar Bullish or Bearish?

It does not inherently indicate a bullish or bearish bias. It simply represents a period of consolidation or market indecision. Thus, a formation in an uptrend can be bullish and signal a continuation of the trend, or bearish and signal a trend reversal. The same concept applies to a downtrend, where the indicator may be bearish and the trend will continue, or bullish and the trend will reverse.

What Does a Bullish Inside Bar Mean?

The meaning of an inside bar candle pattern that is bullish refers to the pattern, after which the price moves upwards. When this pattern forms during an uptrend, it suggests a temporary pause or consolidation before the uptrend potentially resumes. When it is formed in a downtrend, it signals a trend reversal.

What Is the Inside Bar Strategy?

In the inside bar strategy, traders wait for the pattern to form and look for a breakout above the high of the formation to enter a long position or below the low to enter a short trade. A stop-loss order might be placed below the low of the pattern in a long trade and above the high of the pattern in a short trade. Profit targets can be determined based on the trader's trading plan, technical indicators, or key support and resistance levels.

How May You Confirm an Inside Bar Signal?

As the inside bar provides both continuation and reversal signals, it is critical to confirm them. First, traders wait for the pattern to form and the following candles to close above or below it. Second, traders use volume or momentum indicators to identify the strength of the price movements. Another option is to use chart patterns that also provide continuation or reversal signals.

Are Inside Bars More Popular in Downtrends?

No, the inside bar pattern can be used in both uptrends and downtrends. No statistics can confirm that the pattern is more preferable in a downtrend. Traders can use it in their trading strategies regardless of the trend they trade in.

*Important: At FXOpen UK, Cryptocurrency trading via CFDs is only available to our Professional clients. They are not available for trading by Retail clients. To find out more information about how this may affect you, please get in touch with our team.

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