Inside Candle Strategy

An inside candle forms when one candle remains within the high and low range of the previous candle, known as the mother candle. It may indicate a period of market uncertainty before a possible price movement.

• The inside candle is smaller than the mother candle and stays within its range.
• It can form in upward, downward, or sideways markets.
• A bullish inside candle forms when the closing price is higher than the opening price during an uptrend.
• A bearish inside candle forms when the closing price is lower than the opening price during a downtrend.
• Multiple inside candles within one mother candle may indicate a longer consolidation period.
   

An inside candle is a candlestick pattern where the second candle’s trading range is completely contained within the previous candle’s range. The first candle is called the mother candle, while the smaller candle that forms within it is called the inside candle.
The pattern can include the candle body and wicks. In simple terms, when a large candle forms first and the next candle remains within its high and low levels, it creates an inside candle pattern.
For example, if a stock moves between ₹100 and ₹110 during one trading session, and the next candle stays between ₹103 and ₹108, the second candle is an inside candle.
 

To use an inside candle strategy, it is important to identify the pattern correctly. The following characteristics can help confirm an inside candle.

Size and position

The inside candle is smaller than the mother candle. Its opening and closing prices remain within the price range of the mother candle.

Depending on the opening and closing prices, the inside candle can form in the upper, middle, or lower part of the mother candle.

Number of candles

An inside candle strategy considers the mother candle, the inside candle or candles, and the candle that follows the pattern.

Sometimes, more than one inside candle can form within a single mother candle. A higher number of inside candles may indicate greater indecision in the market.

Direction

Inside candles can form in upward, downward, or sideways markets.

An inside candle should not be interpreted on its own. Traders usually consider the existing trend and the market phase before analysing the pattern.

Inside candles can be classified based on the direction of price movement. They are mainly divided into bullish and bearish inside candles.

Bullish inside candlestick

A bullish inside candlestick forms when:

• The closing price of the candle is higher than its opening price.
• The candle forms within a clearly established uptrend.

This pattern may indicate possible upward price momentum. Traders using technical analysis may study this pattern along with other market factors.

Bearish inside candlestick

A bearish inside candlestick forms when:

• The closing price of the candle is lower than its opening price.
• The candle forms within a clearly defined downtrend.

This pattern may indicate possible downward price pressure. Traders may analyse this pattern with other market information before making decisions.
 

The inside bar candle pattern is used by traders to identify possible price movements. It can be easier to interpret in trending markets, while counter-trend situations may require more experience.

Inside bars are common on lower timeframes and may sometimes create false breakouts. Due to this, traders generally analyse them on daily charts.

Multiple inside bars can form within a single larger candle. This may indicate a longer period of consolidation before a possible price movement.

For example, if a stock remains within a narrow range for several trading sessions after a large movement, it may indicate that buyers and sellers are waiting for a stronger direction.

Inside bars can also develop into other price action patterns, such as pin bars and fakeys. Practising how to identify these patterns can help traders understand their formation.

Read more: Stock brokerage calculator 

An inside candle strategy depends on factors such as the prevailing trend, previous and succeeding candles, and other indicators.

Some commonly considered approaches include:

• Breakout plays

  
  

  Inside bars can be studied in the direction of the overall trend.

  
  

  A buy stop order is placed above the mother candle’s high, and a sell stop order is placed below the mother candle’s low. Once the price breaks these levels, the order may get triggered.

  
  

• Reversal plays

  
  

  Inside bars can also be studied against the existing trend, especially near key support or resistance levels. This approach requires more experience because identifying a reversal can be more difficult.

  
  

• Mother bar size

  
  

  A larger mother candle may sometimes lead to larger breakouts.

  
  

  A stop-loss can be placed at the opposite end of the mother candle or around its halfway point, depending on the trading approach.

  
  

• Timeframe

  
  

  Inside bars are generally considered more reliable on higher timeframes, such as the daily chart. Smaller timeframes may contain more market noise and can result in false breakout signals.

  
  

• Multiple inside bars

  
  

  Sometimes, multiple inside candles form within a mother candle. This pattern is known as coiling inside bars. It may indicate a longer consolidation period before a possible larger price movement.

  
  

• Risk-reward

  
  

  Inside bars may offer favourable risk-reward ratios because they can provide clear stop-loss levels and the possibility of larger price movements after breakouts.

  
  

• Practice

  
  

  Practising how to identify inside bars on charts can help traders understand the pattern before applying it in live trading.

  
  

• Other patterns

  
  

  Inside bars can also form part of other price action patterns, including pin bars and fakeys.

  
  

• Trading psychology

  
  

  Successful inside bar trading requires patience and discipline, as price movements may take time to develop.

  
  
  

Inside day candles are commonly used in technical analysis to study possible price movements. Like any other candlestick pattern, they have certain advantages and limitations.

Pros of inside day candles

• Prevalence: Inside day candles can occur across different asset classes, including stocks and cryptocurrencies.
• Trading opportunities: The pattern can provide opportunities to analyse possible buying and selling scenarios.
• Versatility: Inside day candles can be studied in both trending and ranging market conditions.

Cons of inside day candles

• Trading challenges: Successfully identifying and applying inside day candles can require experience and practice.
• False signals: In sideways or flat markets, inside candles may produce misleading breakout signals.
• Time-consuming: Trades based on inside candles may take time to develop, which can affect capital and lead to missed opportunities.

Inside day candles are widely used by technical traders, but they should be carefully evaluated before being included in a trading strategy.

An inside candle is a common candlestick pattern that forms when one candle remains within the range of the previous candle. A single mother candle can also contain multiple inside candles, showing periods of consolidation.
To use an inside candle strategy effectively, traders generally wait for confirmation from the trading session after the last inside candle. Other indicators, such as trading volume, moving averages, and Bollinger Bands, may also be considered while analysing the pattern.