The inside bar pattern, also known as the Harami candlestick pattern, is a 2-candlestick pattern that can offer both reversal and continuation signal, depending on where it forms
Features of the inside bar pattern
The inside bar pattern consists of two candlesticks and has the following characteristics:
- The first candlestick has a tall body and is called the mother bar
- The second candlestick has a smaller body and is called the baby or inside bar
- The second candlestick must close within the body of the mother bar
Take a look at the illustration below:
You can see that the smaller body of the second candlestick is completely within the body of the mother bar. Note that the colors of the various bars do not matter.
The significance of the inside bar pattern
The inside bar pattern is considered a period of indecision, but it’s actually a temporary consolidation where traders reassess their position before deciding which direction to push the market.
When this pattern forms at the top of an uptrend, it is considered a bearish reversal signal, and when it forms at the bottom of a downtrend, it is considered a bullish signal.
Within an impulse swing of an uptrend or a downtrend, the pattern is interpreted as a continuation signal.
How to trade the inside bar pattern in a trending market
How you trade the pattern depends on where it forms. Most of the time, when seen in a downtrend or uptrend, it is considered a trend continuation pattern.
So, it’s preferable to trade in the direction of the trend, especially if the pattern forms around a trend line or a support/resistance level.
See an example in a downtrend in the chart below:
Notice that the inside bar formed around a downtrend line. Since sellers are dominating, the pattern was a temporary pause that offers an opportunity to short the market.
The best way to enter the short trade is to wait for the breakdown (breaking below) of the low of the inside bar, which would be a good indication that the downtrend would continue.
See another example in the chart below, but this time, it’s an uptrend:
Notice how the market is clearly trending upward, with impulse upswings that indicate buying activities and downward retracement swings that indicate profit-taking.
You want to see the inside bar pattern form at the beginning of an impulse swing around a support level, as you can see in the chart. The best entry is when the price breaks above the high of the inside bar.
This is just the basics about trading the inside bar in a tending market. If you want to learn how to correctly identify the beginning of impulsive swings in different market conditions, enroll in my trading course.
How to trade the inside bar pattern in a range-bound market
When this pattern forms at the boundaries of a range-bound market, it is considered a reversal pattern that marks the beginning of a new swing.
So, in a range-bound market, if you see the pattern at the upper boundary of the range, look to short the market, and if you see it at the lower boundary, look to go long. See the chart below:
Notice the inside bar pattern that formed at the support level (the lower boundary) and how the market headed for the upper boundary.
Common mistakes traders make when trading the inside bar pattern
There are many mistakes traders make when trading the inside bar pattern. These are a few of them:
1. Not combining the pattern with other technical confluence factors
Many newbies just learn about candlestick patterns, such as the insider bar pattern, and start trading them without any other form of technical analysis. That makes no trading sense as there will be many losing trades.
While the inside bar pattern is a good price action pattern to trade, trading it alone does not offer an edge in the market.
To find high-probability trade setups with the inside bar pattern, you need to have a confluence of three factors: the right trend, key price levels, and the pattern occurring at the right level.
2. Trading the pattern on lower timeframes
Some day traders try to use this pattern in their very low intraday timeframes, such as the 30-minute, 15-minute, and 5-minute timeframes.
The truth is that most of the price action movements on the lower timeframes are simply noise on the timeframes that matter, such as the daily timeframe.
As a price action trader, look for the candlestick patterns on the higher timeframes, especially the daily, H4, and H1 timeframes — the signals are stronger.
Even if you’re a day trader, use the patterns that occur on the higher timeframe to make your decision and then step down to your intraday timeframes to time your entry.
Trading the inside bar pattern on lower timeframes will be very difficult as there will be many false signals and breakouts.
3. Using a tight stop loss
Many traders place their stop loss just above or below the high of the mother bar, but this is dangerous because the stop can easily be taken out before the trade can progress.
Remember that the inside bar pattern represents a temporary consolidation, and after the consolidation, smart money often likes to swing the price in one direction in search of orders to use and fill their positions.
When they do this, they create a secondary pattern known as the hikakke pattern, which is even a stronger confirmation that the trade would move as anticipated.
Be sure to place your stop loss at a safe place where it would not be knocked out by the normal price fluctuations.
You may place it beyond a strong support/resistance level. There are other stop loss methods I explained in my trading course.
Learning how to use the inside bar pattern in your trading is great, but that alone is not enough. In my trading course, I explained how market makers can manipulate the pattern to trap traders, but interestingly, they leave their footprints, which smart traders can use to know their direction. If you want to learn smart money footprints, Join My Trading Course!