Inside bar strategy: breakout rules, a worked example and a free Pine Script

What an inside bar is

Look at two candles. If the second one's high is lower than the first one's high, and its low is higher than the first one's low, the second candle is an inside bar. The first candle is called the mother bar. Nothing about the inside bar's colour or body matters, only its range.

An inside bar shows a moment of balance. Neither buyers nor sellers could push past the previous candle's range. Balance doesn't last, and when the price breaks out of the mother bar, traders take it as a sign of which side won. In Japanese candlestick terms the closest relative is the harami, but a harami compares bodies; the inside bar compares the whole range, wicks included. The candlestick patterns guide covers the harami.

Where traders look for inside bars

• In a trend, after a strong candle. A big mother bar in the trend's direction followed by a small inside bar is a pause before continuation, which is what this strategy trades.
• At a key level. An inside bar right at support or resistance can mark a decision point; the breakout tells you which way.
• On higher timeframes. On the 1-minute chart inside bars are everywhere and mean little. Many traders only use them on the 4-hour and daily charts.

The rules, step by step

1. Spot the inside bar at its close

The candle's high is below the mother bar's high and its low is above the mother bar's low. The mother bar must be at least half the 14-period ATR tall, so tiny ranges don't count.

2. Place a stop order beyond the mother bar

In an uptrend (price above the 200 EMA), place a buy stop just above the mother bar's high: a twentieth of the ATR above it. You only get filled if the price breaks out. With the trend filter off, place a sell stop below the mother bar's low too; whichever fills first cancels the other.

3. Stop beyond the other side

The stop goes just below the mother bar's low. A tighter choice in the script is the inside bar's low, which gives a smaller stop and a bigger position but gets hit more often.

4. Target 2R, and cancel stale orders

The target is twice the risk. If the order hasn't filled within 3 candles, it's cancelled. If another inside bar forms first, the orders move to the new, smaller range.

Worked example: EURUSD, 4-hour chart

EURUSD is in an uptrend. A strong 4-hour candle runs from 1.1672 to 1.1725, a 53-pip mother bar. The next candle stays inside it, between 1.1689 and 1.1717. With the price above the 200 EMA, a buy stop goes at 1.1726, just above the mother bar's high, and the next candle triggers it.

The breakout carries on and the target is reached 13 candles after the fill, a little over two days on the 4-hour chart. With the inside bar's low as the stop instead, the risk would have been about 38 pips and the position about 0.26 lots.

Risk management

• Mind big mother bars. A stop beyond a huge mother bar can be far away. The position shrinks to keep the risk the same, which is fine, but check the 2R target is realistic.
• False breakouts happen. The price can trigger the buy stop and fall back. The stop beyond the mother bar handles that.
• Check the weekend. On the daily and 4-hour charts, a pending order over the weekend can fill at a gap. Cancel it on Friday if that worries you.

Common mistakes

1. Mixing up definitions. This script needs the inside bar's high strictly below the mother bar's high and its low strictly above; some traders count equal highs or lows, so pick one rule and keep it.
2. Trading inside bars on tiny timeframes. On the 1- and 5-minute charts they're mostly noise.
3. Entering at the inside bar's close. The idea is to wait for the breakout; the stop order does that.
4. Ignoring the trend. A breakout against the trend is a reversal trade, and a harder one.

Related breakout ideas: the London breakout trades out of an overnight range, and the break and retest waits for a pullback after the break.

Backtest it yourself on TradingView

This page doesn't quote a win rate or a profit figure, and you should be wary of anyone who does without showing the test. Results change with the market, the dates, the data feed and the costs you put in. The honest way is to run the test yourself, and the free script below does the work in a couple of minutes.

1. Open the chart. On TradingView, open EURUSD on the 4-hour chart.
2. Add the script. Open the Pine Editor from the Pine icon in the panel on the right of the chart (older layouts have it as a tab under the chart), delete the code that's already there, paste this strategy's code and click "Add to chart".
3. Put in your costs. Open the strategy's settings and go to Properties. Enter your broker's commission and a little slippage. A test without costs flatters every strategy, and short-term ones most of all.
4. Read the Strategy Tester. The panel under the chart shows the net profit, the maximum drawdown, the profit factor, the number of trades and a list of every trade. Click a few trades and check on the chart that each one follows the rules. Trade sizes are shown in units rather than lots: 100,000 units is one lot of a forex pair, and 100 ounces is one lot of gold.
5. Change one setting at a time. Compare the mother-bar stop with the inside-bar stop, the trend filter on and off (off places both orders), the minimum mother bar size and the 3-candle expiry. Try the daily chart and GBPUSD and XAUUSD too.

As a rough guide, don't trust a result with fewer than 100 trades, a profit factor under 1 once costs are in, or a drawdown you couldn't sit through with real money. Settings tuned to look good on one stretch of history often fail on the next, so check the same settings on dates you didn't tune them on, then demo trade the strategy for a few weeks. How much history you can test depends on your TradingView plan: the free plan loads 5,000 candles, which is a few months of 15-minute candles but years of daily ones.

The script sizes each trade from the stop loss and your risk percentage, starts with $10,000 and assumes 1:100 leverage (a 1% margin setting), so the tester doesn't flag margin calls on normal forex trade sizes. Change these under Properties to match your account. By default TradingView fills orders at the open of the candle after the signal, so the fill can differ a little from the signal candle's close. Stop orders fill at your stop price, or worse if a candle opens beyond it.

Download the free Pine Script and PDF

//@version=6
// Inside Bar breakout strategy by PipLedger (https://pipledgerfx.com/inside-bar-strategy)
// When a candle trades inside the range of the one before it (the mother bar), places a stop order just beyond the mother bar.
// Free to use and change. For education and backtesting only; not financial advice.
strategy("PipLedger: Inside Bar Breakout", shorttitle="Inside Bar", overlay=true, initial_capital=10000, pyramiding=0, default_qty_type=strategy.fixed, default_qty_value=1, margin_long=1, margin_short=1, currency=currency.USD)

// ---------- Inputs
useTrend  = input.bool(true, "Only trade in the direction of the 200 EMA (off = both sides, one cancels the other)")
stopAt    = input.string("Mother bar", "Stop loss beyond", options=["Mother bar", "Inside bar"])
bufAtr    = input.float(0.05, "Buffer beyond the mother bar for the entry (x ATR 14)", minval=0.0, step=0.01)
validBars = input.int(3, "Candles the entry order stays open", minval=1)
minMother = input.float(0.5, "Mother bar at least (x ATR 14)", minval=0.0, step=0.1)
rr        = input.float(2.0, "Target (R multiple)", minval=0.5, step=0.25)
riskPct   = input.float(1.0, "Risk per trade (% of equity)", minval=0.1, maxval=5.0, step=0.1)

// ---------- Helpers
fx = strategy.convert_to_account(1.0)  // one unit of the chart's quote currency in account currency (1 on USD-quoted charts)
calcQty(float entry, float stop) =>
    float dist = math.abs(entry - stop)
    dist > 0 and not na(fx) ? strategy.equity * riskPct / 100 / (dist * syminfo.pointvalue * fx) : 0.0

atr    = ta.atr(14)
ema200 = ta.ema(close, 200)
inside = high < high[1] and low > low[1] and high[1] - low[1] >= minMother * atr[1]

var int   pend  = 0     // 1 = waiting orders are live
var int   pBar  = na
var float mHi   = na
var float mLo   = na

flat = strategy.position_size == 0
// a trade has opened, or the orders have waited long enough: cancel what's left
if pend == 1 and (not flat or (bar_index - pBar >= validBars and not inside))
    strategy.cancel("Long")
    strategy.cancel("Short")
    pend := 0

// ---------- New inside bar: stop orders beyond the mother bar
if flat and inside
    float buf    = atr * bufAtr
    float bEntry = high[1] + buf
    float sEntry = low[1] - buf
    float bSl    = (stopAt == "Mother bar" ? low[1] : low) - buf
    float sSl    = (stopAt == "Mother bar" ? high[1] : high) + buf
    bool  goL    = not useTrend or close > ema200
    bool  goS    = not useTrend or close < ema200
    float qL = calcQty(bEntry, bSl)
    float qS = calcQty(sEntry, sSl)
    pend := 0
    // a second inside bar moves the orders to the new, smaller mother bar (calling strategy.entry again with the same id updates the order)
    if goL and qL > 0
        strategy.entry("Long", strategy.long, qty=qL, stop=bEntry, oca_name="inside", oca_type=strategy.oca.cancel)
        strategy.exit("Long exit", "Long", stop=bSl, limit=bEntry + (bEntry - bSl) * rr)
        pend := 1
    else
        strategy.cancel("Long")
    if goS and qS > 0
        strategy.entry("Short", strategy.short, qty=qS, stop=sEntry, oca_name="inside", oca_type=strategy.oca.cancel)
        strategy.exit("Short exit", "Short", stop=sSl, limit=sEntry - (sSl - sEntry) * rr)
        pend := 1
    else
        strategy.cancel("Short")
    if pend == 1
        mHi  := high[1]
        mLo  := low[1]
        pBar := bar_index

// ---------- Chart
plot(pend == 1 ? mHi : na, "Mother bar high", color=color.new(color.teal, 0), style=plot.style_linebr)
plot(pend == 1 ? mLo : na, "Mother bar low", color=color.new(color.red, 0), style=plot.style_linebr)
plot(useTrend ? ema200 : na, "200 EMA", color=color.new(color.gray, 0))
plotshape(inside, "Inside bar", shape.circle, location.abovebar, color.new(color.orange, 0), size=size.tiny)

Trading this from India

Residents can trade EURUSD, GBPUSD and USDJPY futures and options on NSE and BSE through a SEBI-registered broker. The contracts are quoted the same way as the spot pair, one lot is 1,000 units of the base currency, and they're cash-settled in rupees. They trade only from 9 a.m. to 7:30 p.m. IST, volumes are thin and not every broker offers them, so check the hours and the spread first. Trading forex or CFDs with offshore online platforms isn't allowed for residents under FEMA, even if the app is easy to download. Details are in is forex trading legal in India.

Related strategies: break and retest, engulfing candle, previous day high and low, liquidity sweep, XAUUSD pin bar, support and resistance bounce. All 34 strategies are compared on one page in forex trading strategies.