The inside bar is one of the most popular and versatile price action patterns used by traders worldwide. It signals consolidation and often precedes significant breakout moves. Whether you are a swing trader, day trader, or position trader, understanding inside bars can significantly improve your trading results.
What is an Inside Bar?
An inside bar is a two-bar pattern where the second bar (inside bar) is completely contained within the range of the first bar (mother bar). The inside bar's high is lower than the mother bar's high, and its low is higher than the mother bar's low. This pattern represents a pause or consolidation in the market.
Simple Rule: If you can draw a box around the mother bar, the inside bar should fit completely within that box without touching the edges. The inside bar shows market indecision and typically precedes a breakout.
Identifying Inside Bars
A valid inside bar pattern has these requirements:
- Mother bar: The first candle that establishes the range
- Inside bar: The second candle fully contained within the mother bar
- High requirement: Inside bar high is less than mother bar high
- Low requirement: Inside bar low is greater than mother bar low
- Color does not matter: Either candle can be bullish or bearish
What Inside Bars Tell You
The inside bar pattern reveals important market dynamics:
The Psychology Behind Inside Bars
- The mother bar shows strong directional movement
- The inside bar shows the market pausing to consolidate
- Neither buyers nor sellers can push beyond the mother bar range
- Energy is building for a potential breakout move
- The breakout direction often leads to a significant move
Types of Inside Bar Setups
Inside Bar with Trend (Continuation)
When an inside bar forms in the direction of the trend, it often signals continuation:
- In an uptrend: Bullish mother bar followed by inside bar suggests buying pause
- Breakout above the mother bar high continues the uptrend
- In a downtrend: Bearish mother bar followed by inside bar suggests selling pause
- Breakout below the mother bar low continues the downtrend
Inside Bar at Key Levels (Reversal)
Inside bars at support or resistance can signal reversals:
- At resistance after uptrend: Watch for downside breakout
- At support after downtrend: Watch for upside breakout
- These setups often have excellent risk-to-reward ratios
Trading Strategies
Strategy 1: Classic Breakout Entry
The most straightforward approach is to trade the breakout.
Bullish Breakout Setup
Stock ABC forms an inside bar pattern in an uptrend:
- Mother bar: High $55, Low $50
- Inside bar: High $54, Low $51
- Entry: Buy stop at $55.10 (above mother bar high)
- Stop loss: Below mother bar low at $49.90
- Target: $60 (equal to pattern range added to breakout)
Strategy 2: Inside Bar Low Entry
For bullish setups, some traders enter at the inside bar low for better risk-to-reward:
- Wait for price to pull back to inside bar low area
- Enter long with tight stop below mother bar low
- This provides larger profit potential if breakout occurs
- Risk: The pattern may break down instead of up
Strategy 3: Multiple Inside Bars
Sometimes you see two or more inside bars in a row, creating a coiled spring effect:
- Each additional inside bar increases the compression
- The eventual breakout is often more powerful
- Use the original mother bar for entry and stop levels
Where Inside Bars Work Best
Inside bars are most effective in these contexts:
- Trending markets: Inside bars in strong trends are reliable continuation signals
- Key support/resistance: Inside bars at major levels can signal reversals
- After large moves: Inside bars following big candles often lead to continued moves
- Daily charts: The pattern is most reliable on daily timeframes
Inside Bar Stop Loss Placement
Proper stop placement is crucial for inside bar trading:
- Conservative: Place stop beyond the mother bar high/low
- Aggressive: Place stop beyond the inside bar high/low
- Middle ground: Place stop at 50% of the mother bar range
Most traders prefer the conservative approach using the mother bar levels, as it gives the trade more room to develop.
Common Mistakes to Avoid
- Trading in choppy markets: Inside bars in ranges often produce false breakouts
- Ignoring the trend: Counter-trend inside bars have lower success rates
- Too tight stops: Using inside bar levels for stops often leads to early stops
- No confirmation: Wait for actual breakout before entering
- Overtrading: Not every inside bar is worth trading
Volume Analysis
Volume provides valuable confirmation for inside bar trades:
- Low volume inside bar: Normal consolidation, wait for breakout volume
- High volume breakout: Confirms the move has participation
- Declining volume into inside bar: Classic setup for breakout
Timeframe Considerations
Inside bars appear on all timeframes but reliability varies:
- Daily charts: Most reliable, preferred by swing traders
- Weekly charts: Very powerful signals for position trades
- 4-hour charts: Good for active swing traders
- Hourly and below: More noise, need additional filters
Inside Bar Variants
Several important variations exist:
- Inside bar with small body: Similar to doji, shows strong indecision
- Inside bar with trend bias: Bullish/bearish inside bar based on close location
- Inside bar-inside bar: Two consecutive inside bars, powerful compression
- Hikkake pattern: Failed inside bar breakout that reverses
Track Your Inside Bar Trades
Pro Trader Dashboard lets you track all your pattern-based trades. See which setups perform best, analyze your win rate by pattern type, and improve your trading over time.
Summary
The inside bar pattern is a versatile tool that signals consolidation and potential breakout opportunities. When you see an inside bar, especially in trending markets or at key levels, prepare for a potential breakout trade. Use proper stop placement beyond the mother bar, wait for confirmed breakouts, and manage your risk carefully. This pattern can become a cornerstone of your price action trading strategy.
Continue learning with our guides on the outside bar pattern and pin bar strategy.