Inside bar strategy: trading the breakout of the mother bar

What an inside bar is

Take any two consecutive candles. If the second one has a lower high and a higher low than the first, the second candle is an inside bar, and the first is called the mother bar. The colour of either candle does not matter, and neither does the size of the bodies; only the highs and lows count.

What the pattern describes is contraction. On the mother bar, price travelled a certain distance. On the inside bar, it travelled less and stayed within that distance. Buyers could not get above the previous high and sellers could not get below the previous low. It is a moment of balance, often after a strong move, while the market decides whether to continue.

On a daily chart an inside bar is a day when nothing broke out. On the major forex pairs that happens often after a big trend day, ahead of a central bank meeting, or on a quiet Monday. Some inside bars are followed by a sharp move as the balance breaks; many are followed by nothing in particular. The strategy below is about choosing the first kind and limiting the cost of the second.

Variations

A tight inside bar, whose range is small compared with the mother bar, shows more compression than one that nearly fills the mother bar. Two or three inside bars in a row inside the same mother bar are a stronger squeeze still. Some traders also count bars whose high or low exactly equals the mother bar's; this page uses the strict definition and treats a tie as not inside.

The setup: trend, mother bar, inside bar

This version trades inside bars in the direction of an established trend, which is the most robust way to use them.

1. The trend

The daily chart shows higher highs and higher lows (or the reverse for a short). If you want a mechanical filter, require price to be above a rising 50-day moving average. An inside bar in a sideways market has no trend to continue and no obvious direction to trade.

2. A strong mother bar

The best mother bars move in the trend's direction and close near their extreme: in an uptrend, a bullish candle that closes in its top quarter. That shows the trend pushing. A mother bar that is unusually large, two or three times the average daily range, is a different case, because the stop needed is then very wide.

3. The inside bar and the entry

Once the inside bar has closed, place a buy stop order a few pips above the mother bar's high. If price breaks above it, the order fills and you are in. If price never breaks out, nothing happens. Cancel the order if price breaks the other way first, below the mother bar's low, because the setup has failed before it triggered.

In the chart above, a strong bullish mother bar is followed by a small inside bar. The next day breaks above the mother bar's high and fills the buy stop; the stop loss sits below the inside bar's low and the target is twice the risk.

Where the stop goes and how to exit

There are two standard places for the stop loss, and the choice changes the trade.

• Below the inside bar's low (for a long). Tighter, so the position can be larger for the same risk, and the reward-to-risk ratio to a fixed target is better. More often hit by normal noise.
• Below the mother bar's low. Wider and harder to reach. If price falls below the whole mother bar, the pause has clearly resolved the wrong way. The position must be smaller.

Pick one and keep it for at least fifty trades so you can judge it. Either way, size the position from the actual stop distance with the position size calculator so a loss costs the same fixed share of your account whichever stop you chose.

For targets, the previous swing high in an uptrend is the natural first objective, because that is where the last push stalled. Twice the risk is the simple, testable alternative. Some traders measure the mother bar's range and project it from the breakout point, which often lands near the same place. If you prefer to let a winner run, move the stop to breakeven once price has travelled one times the risk, then trail it below each new daily higher low.

A practical point about pending orders: an inside bar that forms on Friday leaves a buy stop sitting through the weekend. If the market gaps above it on Monday, the order fills at the open, above the planned entry. Some traders only place inside bar orders from Monday to Thursday for that reason.

When inside bars fail: the false break

The inside bar's weakness is the false break. Price pokes above the mother bar's high, fills the buy stop, and then reverses on the same day or the next, closing back inside the mother bar and often running straight to the stop. The break was a few eager orders and a sweep of stops above the high, not a real continuation.

False breaks cluster in particular situations, so you can avoid some of them:

• Into resistance. An inside bar just under a major daily resistance level breaks straight into sellers. Look left before placing the order.
• Late in a trend. After several strong days without a pullback, the market is stretched and a pause is more likely to become a correction than a launch.
• Around news. An inside bar the day before a central bank decision or a jobs report reflects waiting, and the release can break either side, often both.
• In ranges. In sideways markets inside bars are frequent and breaks in either direction tend to fail.

Some traders turn the failure into a setup of its own: when price breaks one side of the mother bar and then closes back inside, they trade towards the other side. That idea, trading a failed break and the stops it took out, is the subject of the turtle soup strategy. It is a separate set of rules, not an excuse to reverse every losing trade.

How to test an inside bar strategy

Inside bars are defined by exact highs and lows, so they are among the easiest patterns to test without bias.

1. Use the daily chart of one market and go back two or three years. Your broker's daily candles matter: brokers with a different daily close time can show different inside bars.
2. Mark every inside bar, then keep only those that meet your trend and mother bar rules.
3. For each one, record whether the buy stop filled, and if so the entry, stop, exit and result. Record the setups that never triggered too.
4. Test both stop placements on the same set of trades and compare the average win, the average loss and the longest losing streak.

Include the spread and the gap fills on Monday opens. Fifty trades is the minimum before you draw conclusions, and a couple of markets will get you there faster. Before choosing your risk per trade, check the longest losing streak in the drawdown calculator. The academy lesson on price action trading without indicators covers related candle patterns in more depth.