The Art of Trading: Deciphering Inside Bars in Stock Market

Investing in the stock market can be an overwhelming endeavor, especially when confronted with various market patterns and terminologies. This article is a simplified guide on how to comprehend the 'Inside Bar' pattern in stock trading for better returns.

Key Takeaways

1. Understanding what an inside bar is and differentiating it from an outside bar
2. Importance of the position of an inside bar in predicting market trends
3. Strategies for setting entry point, target, and stop-loss when trading based on the inside bar pattern

Deciphering Stock Market Bars

Bullish and Bearish Engulfing Patterns

A Bullish Engulfing Pattern is a two-candle trend where the first candle is smaller than the second and the second, white candle 'engulfs' the previous one entirely. This pattern signifies possible bullish sentiment and is most influential in a downturn.

Contrarily, a Bearish Engulfing Pattern occurs at the end of an uptrend. The red candle engulfs the prior candle, indicating potential bearish sentiment and possible downturns ahead.

Understanding Inside Bars

Inside bars unify two candle patterns where the 'baby' candle falls within the range of the previous 'mother' candle. Traders often refer to this pattern as a 'Harami' candle, an analogy drawn from the Japanese word 'Harami,' meaning pregnant woman.

However, the role of an inside bar (reversal pattern or continuation pattern) depends on which side of the bar the successive candles break through.

Trading with Inside Bars

The concept of an inside bar is instrumental in plotting stock positions; entry, exit, and stop-loss points.

Entry Point

If a stock's price breaks out of the inside bar range, particularly at the end of the day, it's potentially a good point of entry.

Target

By default, the target price or exit point should be equivalent to the range of the inside bar. However, this subject to market performance and can reach two or three times the range value.

Stop-Loss

The stop-loss price should be at the low price of the baby or mother candle, depending on the trader's risk appetite.

However, the application of this strategy does not guarantee assured success. Traders may still encounter occasional failures, where the candle breaks out of the bar and refalls below the range.

Invalid Patterns for Inside Bars

Invalid patterns often include candles with thin bodies or no bodies at all (Doji candlesticks). Similarly, gaps in the pattern, such as a bearish breakout for a bullish reversal pattern, render the inside bar pattern invalid.

Conclusion

Harnessing the power of inside bars requires a deeper understanding of stock market movements and the patience to await the most opportune moments. It is not an infallible method, but with proper execution and risk management, the inside bar strategy can aid traders in making profitable investment choices.

The author continues to provide more insights on stock market strategies and potential winning stocks in their month-by-month stock studies. Be sure to stay attuned for more in-depth analysis.