How to Trade Inside Candle Pattern

We are going to continue the series on Japanese candle formations in the post. Last time we discussed pin bar pattern and what you can expect when it is formed on various time frames. Today I want to look at another very powerful and popular candle pattern and that is inside candle.

What is inside candle pattern?

Inside candle is simply a candle that forms within another candle. The candle that it forms within is usually called mother candle. Needles to say that mother candle is bigger than an inside one. In itself it does not indicate whether it is a bearish or bullish pattern. Price may go either way when it finally breaks out within the confines of mother and inside candles.

Inside candle

inside candle pattern

Despite the fact that the pattern might be neutral in itself, traders do monitor price areas where they form. It is usually accepted that if this formation happens around important support level, there is a much higher chance for price to go up, than down. If this formation happens to be around important resistance level, there is a much higher chance for price to go down, than up.

How to trade the pattern?

The best way to trade it is to wait for a break of a mother candle and go in the direction breakout occurs. If the mother candle is broken upwards, you buy, if it is broken downwards, you sell.

In the example below you can see a daily chart of eur/usd pair. On the 12th of March, 2014 the pair ran into important resistance level. A sharp reversal took place and a mother candle formed. The next three candles formed within the mother candle. On the 18th of March a break downwards finally occurred. Price went down for over 150 pips before reversing. Now, you could have traded the break by placing a sell stop order a few pips below the mother candle (the low for that candle was 1.3844). So, you could have put a sell order at 1.3840 with some 50 pip stop loss and 100 or more take profit target. The trade would have played out well and you would have made more than double of what you had initially risked. You would have done the opposite had the pattern formed near important support level. You would have bought a break of mother candle upwards.

eur/usd daily chart (inside candle pattern: bearish)

eurusd inside candle pattern