Inside Bar Chart Pattern
An Inside Bar (Bullish) indicates a possible reversal of the current downtrend to a new uptrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook. Two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars. Often the immediate effect is trend exhaustion and potentially, a reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.
An Inside Bar is a reversal formation characterized by a bar that forms totally within the trading range of the preceding bar. Inside Bars reflect a balance between buyers and sellers following a sharp up or down move, which is sometimes later resolved by a change in trend.
Inside Bars can be either Bullish or Bearish depending on the direction of the inbound trend. If the inbound price trend is up, then upon identification of an Inside Bar, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down, then upon identification of an Inside Bar, taking a long position or closing a short position is recommended. Look for confirmation in a trend-line break.
The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.
The sharper the trend preceding the pattern, the better.
The wider the first bar and its immediate predecessors in relation to previous bars, the better. This is evidence that the strong underlying momentum of the prevailing trend has climaxed and will dissipate.
The smaller the second bar relative to the broader range of the first bar, the more dramatic the change in the buyer/seller balance and therefore the stronger the signal.
Volume on the inside bar should be noticeably smaller than that of the preceding bar since it indicates a more balanced situation.
An Inside Bar indicates a balancing of sentiment between buyers and sellers after a sustained up or down move. On the Inside Bar's second day, especially with a drop in volume, we are seeing a drop off of interest in this instrument. This balancing usually leads to a period of sideways price movement, but a reversal is possible.
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