Inside Bars: Points of Market Equilibrium & Consolidation
Inside bars open up a whole new aspect to traders within the stock market. The inside bar pattern is a two-candle formation where the inside bar is smaller in size, and trades within the high-low range of the prior bar. You may see traders mention “inside day” or “inside week,” or maybe even “inside 15.” The inside bar pattern is what these traders are referring to, meaning there is an inside bar printed on the daily, weekly, or 15 minute chart.
The bar prior to the inside is typically referred to as a “mother bar.” From time you time, you may also see the inside bar labeled as the “IB” while the mother bar is labeled as the “MB.” An example of each is shown below:
Inside bars signal a period of consolidation within a market. This equilibrium or consolidation is taking place on a lower time frame. For example, an inside day found on the daily chart is likely a consolidation pattern found on the 30 or 60 minute charts. Below is an example of this using $MS daily and 30 minute charts.
Inside bars often form following a stronger move in the market, as price takes a break and consolidates before making another move. However, inside bars can form at major turning points for the market and play as reversal signals, so it is always best practice to wait for confirmation before establishing a position in a trade.
Trading Inside Bars
There are many traditional strategies when trading inside bars. Some may include setting a buy stop just above the mother bar. This way, when price breaks above that level, your order is automatically placed. The traditional stop loss level is at the midpoint of the mother bar, which makes much more sense than the traditional entry of placing a buy stop to enter on the break above. Though this method of entry/exit may be effective in certain inside bar patterns, I can assure it is not an efficient strategy. As each inside bar setup is different, the lower time frame setup will not be the same each time. Several examples are below to demonstrate this. Keep in mind that in a hypothetical break out, your stop loss should be much closer to your point of entry than displayed below. The first red flag of a reversal would be taking out the buy stop level (to the downside, once your order is placed). So on the contrary, it would seem that the ideal buy level is a break and close above the inside candle, with a stop loss set just below that same level.
In a symmetrical triangle formation, with the midpoint of the mother bar essentially representing the apex (or contraction climax of price action on lower time frames), this level of stop loss placement would be a valid method to protect the trader from a symmetrical triangle breakout reversal. It is not uncommon for price to come back and retest this apex before moving higher in such a breakout, but a full breakdown of the apex would signal a reversal and false breakout… often referred to as a “bow draw reversal.” An example of this can be seen below on the $SPY 60 minute chart.
When it comes to the entry, setting such a buy stop order sets yourself up for a potential risk of a inside breakout reversal, also referred to as a “revstrat.”
The Revstrat Setup
The revstrat is a very effective strategy when applied correctly. A “revup” or “revdown” (based on direction of the move), is essentially an inside candle breakout failure, or reversal. When the equilibrium or consolidation that formed the inside bar is broken, the close of that break candle is so much more important than the break itself. As an example, if price breaks above the inside range and holds to close the candle in that new range, it’s a bullish setup and price is likely to continue to the upside. However, if price breaks above the inside range and is sold, to the tune of not being able to hold that new range and closes back within the inside bar, that’s a revstrat, and a failed breakout of that inside bar. In this case, the revstrat or “revdown” would be a bearish setup, trapping bullish traders in a failed breakout move as shown below:
Broken down on lower time frame:
Going back to a previous post, Consolidation discussed energy builds in coil patterns that create an energy release once price breaks out. Well, in a case involving a revstrat, that energy is misread by many. In the case of $BA, shown above, lower time frames showed a failed bull flag, while at the same time displaying an inside & down on the daily (but it hadn’t closed yet). Without realizing it, shorts only added to the energy build. Once they realize the breakdown was recovering and reversing to the upside, they cover their shorts or buy back the stock, creating more buying and therefore releasing the energy back to the upside. In certain cases, this energy reversal can be faster and more violent than a standard breakout would have been, much like the “bow draw reversal” mentioned earlier.
Some of my favorite setups include those that involve an inside bar. It’s fascinating that patterns can exist within patterns. Remember to analyze multiple time frames. While an inside 60 may look enticing, analyzing price on higher time frames may reveal the bigger picture for you.
Keep in mind that higher time frame inside bars are obviously more significant than lower time frames. For example, an inside & up on the weekly chart holds far more weight than an inside & up on the 30 or 60 minute. If two inside (confirmed & closed) breakouts coincide on two different time frames (inside & down day + inside & up week), again the higher time frame will typically prevail. Look at the product from every angle before you buy it.
Inside bars are often a powerful consolidation pattern on a lower time frame that can lead to substantial moves on the daily, weekly, or even monthly charts. Knowing what to look for can help at not only finding premium entry opportunities, but also warnings at key levels for exits and adds/trims.
A big tip for all of the TradingView users out there regarding inside bars. There is an inside bar indicator that you can add to your charts that is within the TradingView library. This indicator will label each inside bar for you with an icon of your choice above it (I use a blue X), and is a huge help to those who trade using this strategy regularly. When you get to the page, scroll down and hit “add to favorite scripts.” Then open a chart, and click indicators. It should be saved in your favorites and you can add to any chart. Awesome tool. I use this one every day. Example is below. Here’s the link: IB Bars
I hope that you’ve learned something valuable that you can take with into trading sessions moving forward. If you feel the above content would be of value to other traders, please take the time to share. “Happy trading.”