The Inside and Outside Bars: A Trader’s Guide | TrendSpider Learning Center (2024)

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What are the Inside Bar and Outside Bar?

Inside and Outside Bars are two prevalent candlestick patterns in technical trading. The ‘Inside Bar’ is characterized by a bar or candle that is entirely ‘inside’ the range of the preceding one, whereas the ‘Outside Bar’ completely ‘overshadows’ or ‘engulfs’ the previous bar.

However, there’s a slight controversy in defining the Inside Bar. Some traders define an Inside Bar based on the high and low of the bar, while others consider the open and close. According to the first definition, an Inside Bar has a higher low and a lower high than the previous bar. According to the second definition, both the open and close of the Inside Bar are within the range of the previous bar’s open and close.

Moreover, these patterns can also be combined with other patterns. For instance, an ‘Inside Hammer’ is when the second bar is both an Inside Bar according to the selected definition and shaped like a ‘Hammer’. Other variations could include Inside Dojis or Inside Pin Bars.

How to Trade the Inside and Outside Bars

1. Identify the Pattern: The first step is to identify the Inside or Outside Bar on the chart. Make sure to consider both definitions of the Inside Bar if applicable.
2. Assess the Market Context: Consider the overall market trend and the context in which the pattern forms. A pattern formed at a key support or resistance level could be more significant.
3. Determine the Direction: For Inside Bars, consider entering a position in the direction of the breakout. For Outside Bars, look to trade in the direction of the bar’s closing.
4. Set Stop Losses and Take Profits: Use the previous bar’s high and low as a benchmark for setting stop losses. Determine your take profit level based on your risk-reward ratio.

Example scanners based on The Inside and Outside Bars

The Inside and Outside Bars can be used in Scanning the market. To see how exactly they can be used in these ways, we provide the following samples. Both scanners search the market for stocks using these candlestick patterns.

Trading Tips for Inside and Outside Bars

1. Higher Timeframes: The patterns are more significant on higher timeframes.
2. Risk Management: Always have a clear stop loss and take profit level before entering any trade.
3. Combined Patterns: Pay attention to combined patterns like Inside Hammers or Inside Dojis, which could provide additional information about the market sentiment.

Example Trade using Inside and Outside Bars

If a bullish Inside Bar pattern forms after a significant downtrend, it could suggest a potential bullish reversal. You could consider entering a long position in the direction of the breakout. Conversely, if a bullish Outside Bar forms during a downtrend, it might indicate a possible bullish reversal. Consider going long in the direction of the Outside Bar’s closing.

Remember, candlestick patterns are not foolproof signals, and the Inside and Outside Bars should be used as part of a comprehensive trading strategy. Always test these methods thoroughly and ensure they fit within your overall trading plan.