Inside-bar breakout: a pause, then a close beyond the mother bar

Research status: untested hypothesis. No backtest, paper or live results exist. Every threshold, period, R value and risk fraction is an untested candidate parameter, not a recommendation. An inside bar is a pause, not a signal by itself.

The idea

An inside bar is a candle whose high and low both sit inside the previous candle — the mother bar. It only says the market paused. This playbook asks whether, when a slower chart is already rising, a later completed close above the mother bar’s high gives a testable continuation entry, with the mother bar’s low as a clear invalidation. It is not a pattern-name trade and it is not the same idea as Breakout and retest, which uses a 20-bar range and a retest.

IF–THEN rules

Use completed bars only.

1. Higher-timeframe filter: on the latest completed 4-hour bar, the close is above SMA(50), and that SMA(50) is higher than it was 5 four-hour bars ago.
2. Mother bar: a completed 1-hour bar whose range (high minus low) is between 0.8 × and 2.0 × the 1-hour ATR(14). Too small, and the stop is noise; too large, and the pause isn’t tight.
3. Inside bar: the next completed 1-hour bar has a high ≤ the mother high and a low ≥ the mother low. If two or more inside bars print in a row, freeze the original mother bar; do not walk the definition forward.
4. Break: the first later completed 1-hour bar that closes above the mother high, within 3 bars of the (first) inside bar, is the signal bar. A wick above the high without a close does not count.
5. Cancel the setup if any bar before the signal closes below the mother low, or if 3 bars pass with no close above the mother high. That’s a missed pause, not permission to widen the window.
6. THEN enter at the next bar’s first executable price, if all shared checks pass.

• Stop: the mother bar’s low minus max(2 ticks, 0.05 × ATR(14)). Frozen.
• Target: 2R after estimated costs, from the planned entry and the frozen stop. Frozen. If the mother bar is so wide that 2R is unreachable after costs, skip; don’t invent a closer target that sits inside the mother bar.
• Invalidation exit: a completed close below the mother low exits at the next open (the stop has priority).
• Time stop: 16 one-hour bars.
• Size from the stop with the position-size calculator, at 0.25% of equity (untested modeling parameter). Results in R.
• One setup at a time. After a cancel, exit, or miss, wait for a new mother bar.

When NOT to trade

• The 4-hour filter is off.
• The inside bar forms in obvious 1-hour chop (the close has crossed the 20-bar EMA in alternating directions 4 or more times in the last 10 closes).
• The mother-bar range fails the ATR width filter, or costs eat the room to 2R.
• Any shared no-trade filter fails.
• A short on a close below the mother low is a separate hypothesis.

Common mistakes

• Trading the inside bar itself, before a close beyond the mother high.
• Redefining the mother bar after a second inside bar so the stop “looks tighter.”
• Entering on a wick through the mother high and calling the close optional.
• Using this in a flat range and calling it a continuation. The 4-hour filter is there for a reason; turning it off is a new rule.
• Ignoring misses. A pause that never breaks is part of the sample.

Hypothetical example (made-up prices)

Item	Value
4-hour close above a rising SMA(50)	✓
Mother bar	high 250.00, low 247.60, range 2.40; ATR(14) 1.80 (inside 1.44–3.60) ✓
Inside bar	high 249.40, low 248.10 ✓
Signal close (bar 2 of 3)	250.30 ✓
Entry (next open)	250.35
Stop: 247.60 − 0.09	247.51
Risk per unit incl. 0.08 costs	2.92
2R target after costs	256.19

If it works: price reaches 256.19 within 16 hours: about +2R. If it fails: price trades 247.51 and fills at 247.40: a little more than −1R. Missed pause: three bars pass with no close above 250.00. Record the miss. A public Solana daily inside-bar study — education, not a result for this rule — is in technical examples.

Ratigan Capital rules in this playbook

• Early Is Wrong: buying the inside bar, or the first poke through the mother high, is a different strategy.
• Never Average Down: a failed break of the mother bar is an exit, not a cheaper entry.
• Patience as a Position: most hours are not a complete inside-bar setup.
• Price Is the Only Truth: “inside bar” is a description of two candles, not a reason to skip the stop.

Why it can fail

Inside bars appear in the middle of ranges as often as they appear in trends, and a close beyond the mother high can be the last push of a move that is already extended. A wide mother bar produces a distant stop and a distant 2R target; a narrow one produces noise. The 3-bar window will miss slower breaks and must be counted as a cost of the definition, not fixed after the fact.

Pre-trade checklist

1. 4-hour trend filter true on completed closes?
2. Mother bar width in range, then a true inside bar under that same mother?
3. Close above the mother high within 3 bars, not cancelled, shared filters clear?
4. Stop, 2R target, time stop and size written; net ≥ 2R after costs?

Sources

• StockCharts ChartSchool: Introduction to candlesticks
• StockCharts ChartSchool: Moving averages
• StockCharts ChartSchool: Average True Range (ATR)
• Sullivan, Timmermann & White (1999), Journal of Finance (RePEc listing)
• Core rules for every playbook