The Inside Bar Breakout – Trading Setups

The Inside Bar breakout is a price action setup that indicates a short-term consolidation within the broader context of an existing trend — and a potential confirmation that the trend may be continuing.

It is a candle that forms entirely within the outer points of wicks that formed from the previous candle. This previous candle, often referred to as the mother bar, is critical in the formation of this price pattern.

This setup indicates a pause in market momentum (the market “catching its breath”) during the course of a trend before choosing whether to continue its move in that direction.
When price compresses into an inside bar, buyers and sellers are in temporary balance. The eventual breakout from this pause is where the potential opportunity lies for traders, when aligned with the prevailing trend.

As with all chart patterns, the setup is not complete until a breakout and confirmation candle are seen in the chosen direction.

Bearish Inside Bar Breakout

A bearish breakout occurs when the price breaks below the low of the mother bar following the formation of an inside bar. This shows that sellers have regained or confirmed control after a period of consolidation.

• A: Mother bar → a candle within a trend that sets the boundaries of the setup based on the high and low of its range
• B: Inside bar → a smaller candle that is contained entirely within the mother bar, showing indecision or temporary balance between buyers and sellers.
• C: Breakout and confirmation → price breaks below the low of the mother bar, confirmed by a bearish candle close, showing sellers taking control.

On occasion, you may see a double inside bar where two bars trade within the range of the mother bar before finally breaking out.

Although some people may see this as not a pure inside bar, the market psychology behind the move has not changed.

You can see a real chart example of this on the 4-hourly Nasdaq futures (NDX100) CFD chart, where there was a one-candle pause before continuation of the prevailing downtrend following a reversal to the downside.

Bullish Inside Bar Breakout

A bullish breakout occurs when the price breaks above the high of the mother bar following an inside bar. This demonstrates that buyers have reasserted control after the pause.

• A: Mother bar → an initial large candle showing a defined range.
• B: Inside bar → a small consolidation candle within the mother bar, often reflecting hesitation or equilibrium.
• C: Breakout and confirmation → a bullish candle closes above the high of the mother bar, showing buyers are ready to push higher.

This reflects the market psychology where selling pressure was absorbed during the consolidation for one candle before renewed buying momentum.

You can see a real chart example of this on the 30-minute EURJPY, where a strong move to the upside on the mother bar was temporarily halted, followed by the confirmation bar resulting in a 50 pip move upwards.

Stop Placement and Exits

Risk management is central to the inside bar strategy:

• For bearish setups, stops are often placed above the high of the mother bar.
• For bullish setups, stops are typically placed below the low of the mother bar.

Profit management exit strategies vary depending on the risk profile of the trader and should be articulated in a trading plan. These can include:

• Setting a fixed risk-to-reward level (e.g., 2:1).
• Using trailing stops as price moves continue to move in your desired direction, locking in profits during the life of the trade.
• From a profit target perspective, approaches that target logical chart levels, such as recent swing highs/lows or nearby support/resistance zones, can be considered.

Final Thoughts

The Inside Bar breakout is a flexible strategy that can be seen across different markets and timeframes.

Its strength lies in recognising that markets often pause and compress before a potential move in the same direction as the prevailing trend.

Its popularity is based on the fact that it can provide both an opportunity for entry when an initial trend move has been missed or an indication that accumulation into an existing position could be worth looking at.

By identifying the presence and the range of mother bar, the inside bar, and exercising patience for a decisive breakout, traders aim to capitalise on this temporary contraction and expansion in volatility.

As always, practising this setup and making notes on what happens next is crucial to determining your specific approach and developing testable, unambiguous criteria for action.