Reading candles
Inside bar and harami
A small candle that sits entirely inside the range of the larger candle before it.
Tested more than once and no dependable profit survived costs.
A private-investor tally on US stocks reports inside days continuing the prior trend about 62% of the time, and bearish harami acting as a bullish continuation about 53%, near random. Tests on stocks, index futures and EURUSD mostly find no reliable profit once costs are counted; the few positive results are in stock markets and depend on the exit rule. A pattern describes what price just did. It is not a forecast.
What it is
The large candle is the mother bar and the small one the baby. A harami requires the baby's body to sit inside the mother's body; an inside bar requires its whole range inside the mother's range.
What it suggests
A pause after a large move. Which way it resolves is decided by the break of the mother bar's high or low, not by the inside bar.
How to check it
Wait for a close beyond the mother bar's high or low before treating the pause as resolved.
Common mistakes
- Entering on the inside bar itself.
- Trading it at a random spot rather than at a level.
Claims worth checking
- unverified An inside bar at the top of an uptrend reverses about 65% of the time. Attributed to a well-known pattern statistician in one of the source books. His published inside-day page reports continuation about 62% of the time, and the 65% he publishes belongs to a different, bullish pattern.
How we will test it
On public price history, never on anyone's account. Until it is done, the note above is all we can honestly say.
- Cases: an inside bar at a swing level
- Measure: share of cases where price closes first above the mother bar's high versus below its low
- Window: until one side closes
- Compared with: the same measure for inside bars in a range
Sources
- Marshall, Young and Rose (2006), Candlestick technical trading strategies: can they create value for investors? Journal of Banking & Finance 30(8) (citation and headline finding only)
- Duvinage, Mazza and Petitjean (2013), The intra-day performance of market timing strategies and trading systems based on Japanese candlesticks, Quantitative Finance 13(7) (abstract or primary page read)
- Fock, Klein and Zwergel (2005), Performance of candlestick analysis on intraday futures data, Journal of Derivatives 13(1) (citation and headline finding only)
- Orquin-Serrano (2020), Predictive power of adaptive candlestick patterns in forex market: EURUSD case, Mathematics 8(5) (abstract or primary page read)
- Lu, Chen and Hsu (2015), Trend definition or holding strategy: what determines the profitability of candlestick charting? Journal of Banking & Finance 61 (citation and headline finding only)
- Bulkowski, thepatternsite.com pattern statistics (US stocks; a private investor's tallies, not peer reviewed; his 'reversal rate' counts which side of a small range price exits, so 50% is the baseline) (abstract or primary page read)
Related lessons
Written in our own words. Education only, not financial advice.