The Inside Bar (IB) is a classic and fundamental Price Action setup. Usually, this graphical model belongs to the group of continuation of the main trend. However, quite often IB can be a reversal formation. The Inside Bar setup allows the trader to join the trend at the very beginning of its development with positive risk/profit ratio.
What Does the Inside Bar Look Like
The Inside Bar consists of two candlesticks:
- the first candle (parent candle) is quite big and full;
- the second candle is much smaller and completely within the shadow of the first candle.
The main point of this setup is looking for a temporary agreement in price between buyers and sellers.
Basic Rules of the Inside Bar
– It works best on H1 and more senior timeframes;
– It needs a support level. Transactions are best opened from key support and resistances;
– It reflects trends on senior timeframes. You can always refer to them if you are unsure.
– It is best used in combination with pending orders.
Technical analysis is not an exact science, so when trading on senior timeframes, for example on D1, the extrema of the second candle may slightly go beyond the range of the parent candle.
How To Trade on Inside Bars
There are several ways to open positions on this pattern:
- The position is opened with pending buy/sell stop orders that are slightly above/below the mother candle;
- The position is opened by pending buy/sell stop orders that are slightly above/below the high/low internal candlestick.
Second way is riskier but offers better rewards. Stop loss should be placed slightly above/below the high/low internal candlestick (classic variant) or above/below the local support/resistance level.
If you are interested in practical applications of this pattern, check out our analytics section. We always point Inside Bars out when they appear on the charts.