What Is an Inside Bar Candle and How to Identify It?

Candlestick charting offers a visual representation of price movements over specific time periods, serving as a fundamental tool in technical analysis. These charts provide insights into market sentiment by displaying open, high, low, and close prices. Among the many patterns observed, the “inside bar” is a specific candlestick formation.

Defining an Inside Bar Candle

An inside bar is a candlestick whose entire price range, from its highest point to its lowest point, is contained within the range of the preceding candlestick. The preceding candlestick is often referred to as the “mother bar” or “parent bar” because it encompasses the inside bar. This means the current bar’s high must be lower than the previous bar’s high, and its low must be higher than the previous bar’s low.

The color of either the inside bar or the mother bar, indicating whether they are bullish (closing higher than opening) or bearish (closing lower than opening), does not alter the fundamental definition of the pattern. For instance, a small red (bearish) inside bar can form after a large green (bullish) mother bar, or vice-versa. The critical aspect is the containment of the inside bar’s price action within the mother bar’s boundaries. This containment signifies a narrower trading range for the inside bar compared to its predecessor.

Identifying an Inside Bar

Identifying an inside bar on a price chart involves a clear visual comparison between two consecutive candlesticks. Variations exist where the open or close of the inside bar might extend beyond the body of the mother bar, but the strict high/low containment rule remains paramount. For a true inside bar, the price action must be fully “inside” the mother bar’s range, not just its body.

It is important to note that if the high or low of the inside bar exactly matches the high or low of the mother bar, it does not strictly qualify as an inside bar, as it is not contained within but rather at the boundary. Such precise matches indicate a slight deviation from the classic pattern. Some patterns, like a “double inside bar,” involve two consecutive inside bars contained within the original mother bar, indicating extended compression.

Understanding What an Inside Bar Suggests

The appearance of an inside bar suggests a period of market consolidation or indecision. During this time, buyers and sellers are in a temporary equilibrium, resulting in a narrower trading range compared to the preceding period. This pattern indicates a decrease in volatility, as the market takes a pause after a larger price movement.

While representing consolidation, an inside bar frequently precedes a significant price move from the consolidation range. The market’s indecision, reflected in the inside bar’s smaller range, builds up pressure that can resolve in a clear directional move. The significance of an inside bar can vary depending on its location within a broader trend. For example, an inside bar forming after a strong directional move or near established support or resistance levels may carry different implications for future price action. This pattern visually communicates that the market is “taking a breath” before potentially resuming its prior direction or reversing.