Some traders look to trade inside bars as reversal patterns; hypothesizing that after price has trended up (or down) for an extended period of time – the ‘pause’ in price’s movement (representing the inside bar) precedes a reversal of the trend. In this mannerism, the inside bar is looked at for a short-term trade (or swing) in the counter-trend direction (with the goal of holding the trade for less than 10 bars).
But there is another way to play inside bars; and this is rooted directly from what this candle is NOT telling us.
When we see an inside bar form on our charts, we are seeing a high price and a low price that is inside of the high and low of the day before. This can be looked at as trader’s unwillingness to push price higher or lower for any number of reasons: Perhaps an extremely pertinent report is being issued soon, or perhaps the market had just made a stratospheric leap and traders are tepid about bidding price much higher or lower.
Whatever the reason, the motive is the same: and that motive is looking for potential volatility in an effort to gleam profit. And when we have a situation in which traders are unwilling to bid price higher or lower, we have a potential situation we can look at for future increases in volatility.