How to Trade the Inside Bar Pattern in Forex

The inside bar pattern is a powerful tool in the arsenal of forex traders, offering insight into market consolidation and potential breakout opportunities. This two-candle formation signals indecision in the market, where the second candle (the inside bar) is fully engulfed by the first.

By understanding how to identify and trade this pattern, traders can enhance their decision-making and improve their risk management. In this article, we’ll explore how to effectively trade the inside bar pattern in forex, providing key strategies and tips to elevate your trading game.

Get Started

Earn Cashback on Your FX Trades

Open an account in as little as 5 minutes. Spreads as low as 0.0, trade and manage your positions from a full suite of mobile and tablet apps.

Get Started

Disclosure: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% to 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account

Show More

What is the Inside Bar Pattern in Forex?

The inside bar pattern is a two-candle candlestick pattern that occurs on charts when the current candle's high and low exchange rates are contained within the range of the previous candle. The pattern is neither bullish nor bearish, but it is instead neutral in its implications until a breakout occurs which then tends to result in a considerable follow-on move. 

The visual representation of this two-candle pattern resembles a smaller candle inside a larger candle. Check out the diagram below for an example of what an inside bar pattern looks like.

Diagram showing Inside bar patterns appearing after bearish red and bullish green candles. Source: Mysar-Academy. 

Note that a smaller green inside candle can follow a bearish red mother candle or a smaller red inside candle can follow a bullish green mother candle. Also, the taller initial candle is often known as the mother bar, while the shorter second candle is typically called the inside bar in this candlestick chart pattern.

This candlestick chart pattern represents a temporary consolidation or pause in the forex market that suggests indecision prevails over the future direction of the market. This situation can in turn indicate a potential continuation or reversal of the prevailing trend once a breakout occurs. 

By learning to recognize this important candlestick pattern when it occurs on exchange rate charts, currency traders can better anticipate future exchange rate movements and make more profitable trading decisions.

Identifying Inside Bar Patterns on a Chart

To identify inside bar patterns on a currency pair’s exchange rate chart, forex traders skilled in technical analysis typically look for candles whose high and low are fully encompassed by the previous candle's range. This sort of bar setup means that the high of the current candle is lower than the high of the previous candle, and the low of the current candle is higher than the low of the previous candle. 

Trend

One important characteristic of the inside bar pattern is its relationship to the prevailing trend. Inside bars that occur within an established trend often indicate a continuation of the trend. In contrast, inside bars that show up at the end of a trend can signal a potential reversal. Forex traders should pay close attention to the context in which the inside bar pattern forms to determine its significance and to get a better sense of its possible breakout direction.

Timeframe

The timeframe in which the inside bar pattern appears plays an important role in its interpretation. Inside bars seen on candlestick charts with higher timeframes, such as daily or weekly exchange rate charts, tend to carry more weight and can lead to a stronger exchange rate or price movement once a breakout occurs. Even in shorter timeframes, however, inside bars can still provide valuable forex trading opportunities if the market context aligns with other supportive factors.

Breakout

One of the primary strategies for trading the inside bar pattern involves waiting for a breakout. After an inside bar forms, forex traders can set pending orders above the high or below the low of the pattern since they anticipate a breakout in the direction of the subsequent breakout candle. Once it occurs, this breakout confirms the resumption of the trending market or the potential reversal in the opposite direction.

Risk-to-Reward Ratio

When trading the inside bar pattern, it is essential to consider the risk-to-reward ratio of your trade. Remember to set your stop-loss orders below the low or above the high of the inside bar, depending on the eventual direction of the subsequent breakout. By determining your risk and potential reward before entering a trade and using the ratio of those factors as a trade decision criterion, you can better ensure that your trades have a favorable risk-to-reward ratio.

Size of Candles

The size of the inside bar candles can also provide valuable insights to a forex trader. In general, smaller inside bars indicate a period of tighter consolidation, which in turn suggests an imminent breakout. On the other hand, larger inside bars tend to represent a more significant pause in the market and can lead to more substantial exchange rate movements once a breakout occurs. Analyzing the size of the two candles that form the inside bar pattern can also help currency traders better gauge the strength of potential breakouts.

How to Trade Forex Using the Inside Bar Pattern

To trade forex using the inside bar pattern, you can follow these steps:

1. Identify the inside bar pattern on your exchange rate chart.
2. Determine the prevailing trend and the context in which the two-candle pattern forms.
3. Assess the risk-to-reward ratio of the trade to ensure a favorable trade setup.
4. If the risk-reward of the trade setup looks good, set your trade entry orders to buy above the high or to sell below the low of the inside bar in anticipation of a breakout. 
5. When one of your two orders is executed, make sure to cancel the other order. 
6. Once you enter into a position, remember to place your stop-loss buy order on a short position above the high of the inside bar or put your stop-loss sell order on a long position below the low of the inside bar.
7. Monitor the forex market and manage the trade according to your inside bar pattern trading plan. You will want to have a clear profit-taking target in mind and can also consider protecting any profits that do accrue with a trailing stop order. 

Tips When Trading Inside Bar Patterns

Here are the tips for trading inside bar pattern:

• Consider the Trend: Always check the current market trend before trading an inside bar pattern to understand the overall market context.
• Use Multiple Timeframes: Look at different timeframes to confirm the validity of the inside bar pattern for a better perspective on price movements.
• Set Stop-Loss Orders: Place stop-loss orders to protect your trading capital from unexpected market changes, minimizing potential losses.
• Aim for a Good Risk-to-Reward Ratio: Target a risk-to-reward ratio of at least 1:2, meaning for every dollar you risk, aim to make at least two.
• Practice Risk Management:
• Avoid risking more than a small, manageable percentage of your trading capital on each trade.
• Size your positions according to your risk tolerance and account balance to ensure sustainability.

Following these tips can help you trade inside bar patterns more effectively and protect your capital.

Benefits of Using the Inside Bar Pattern to Trade Forex

The inside bar pattern can be a valuable tool in a forex trader's arsenal. By understanding this pattern’s characteristics and using an effective trading strategy to take advantage of it, currency traders can identify high-probability trading opportunities. 

Like just about any forex trading strategy, however, using the inside bar pattern requires practice and careful risk and money management to achieve the best results. By incorporating the inside bar pattern into your trading approach and following the tips outlined earlier in this article, you can enhance your trading skills and potentially increase your profitability when operating in the forex market.

Frequently Asked Questions