Inside bar and outside bar
Distinguish an inside bar from an outside bar and explain what each says about market expansion or compression.
Lesson path
Market Foundations + Forex Mechanics
Reading Candles
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Distinguish an inside bar from an outside bar and explain what each says about market expansion or compression.
Compression and expansion in two candles
An inside bar is one of the simplest patterns to spot. You only need to look at two candles. The second candle's high must be lower than the first candle's high, and the second candle's low must be higher than the first candle's low. In other words, the entire range of the second candle fits inside the range of the first. The body color and size of the inside bar do not matter for the pattern's definition. What matters is that the range got smaller.
An outside bar is the geometric opposite. The second candle's high is above the first candle's high and its low is below the first candle's low. The entire range of the second candle engulfs the first candle's range, wicks included. Note the difference from an engulfing pattern, which was about body-to-body coverage. The outside bar is about high-to-low coverage. Different rule, different pattern.
What does the market do at each of these patterns? Inside bars represent compression. Buyers and sellers traded inside a narrower range than the previous bar, which often means the market is coiling for the next move. Markets tend to alternate between compression and expansion phases, and inside bars are one of the cleaner visual signs that a compression phase is happening. Breakouts of the inside bar's high or low are a common entry trigger, especially in trending environments.
Outside bars represent expansion. The market traded both higher and lower than the previous bar within a single session. Where the candle closes matters a lot. An outside bar that closes near its high after an expansion lower and back up is typically interpreted as bullish reversal. An outside bar that closes near its low after pushing higher and back down is typically bearish. An outside bar that closes near the middle of its range is usually just volatility without commitment — useful information about volatility, not so useful as a directional signal.
Recap: inside bar = range fits inside the previous candle. Outside bar = range engulfs the previous candle. Inside = compression, often before a breakout. Outside = expansion, with close location telling you the direction.
Knowledge check
Answer before moving on.
1. Which condition defines an inside bar?
2. What is the key geometric difference between an outside bar and an engulfing pattern?
3. An outside bar prints after an uptrend. It pushes above the prior high, sells off through the prior low, and closes near its low. What is the most defensible read?
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