When it comes to learning technical analysis, a lot of investors will consider the “big picture” patterns and make short-term trades based on such indicators or patterns. The problem, however, is that bigger picture readings are often long-term in nature. So, let’s take a look at a short-term pattern.

The inside bar pattern is one such pattern from which investors can take short-term cues. This pattern indicates a possible change in investor sentiment in the short-term. In other words, if the overall trend has been heading down, the inside bar often indicates a reversal in that trend.

Discovering an Inside Bar Pattern

For investors who are learning technical analysis, identifying the inside bar might be a little more difficult. It involves a taller bar one day, followed a smaller bar the next. The smaller bar consists of a trading range within the preceding day’s taller bar.

Confirm The Pattern

Making trades solely on an inside bar pattern is not recommended. Whether just learning technical analysis or a seasoned investors, people need to find support for their decision in other analysis. This includes fundamental data about the security, market as a whole, and sector, as well as other technical data. In particular, using support and resistance levels will help, along with studying the security’s momentum.

In terms of the inside bar itself, investors will find greater reliability when they discover the bar that follows a sharper inbound trend. As well, the wider the first bar and shorter the following bar, the better as this indicates the stronger momentum has ended, and the possibility for a more dramatic turn.

Finally, volumes should be smaller on the inside bar than on the first bar.

When people are learning technical analysis, it is often forgotten no single indicator or pattern should be used by itself when making a trade decision. Other analysis is required. For investors who prefer to know when to buy and sell, there is software available that will do exctly that.