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Inside Bars & Outside Bars

Technical Analysis

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Inside bars have a high-low range that is lower than the high-low ranges of the previous bar. This places the bar “inside” the bar before. This indicates an inability of market participants to determine the future price direction. Buyers and sellers didn’t participate enough to move price or kept the price in a lower range than their previous actions.

In any case, inside bars shows fairly matched levels of buying and selling. If it occurs in an uptrend, the sellers finally came out to match the buyers. If it occurs in a downtrend the opposite is true, and buyers finally woke up. The opposing party can no longer push prices in the previous direction. This situation can result in a reversal if the trend is truly exhausted by the party who previously had control over price direction.

Outside bars are the reversal of inside bars. These bars also indicate a large amount of movement, with the direction stated by the relationship of the open and the close. If the open is low, and the close is high, the time period has bullish movement. If the open is high and the close is low, the time period has a bearish movement. If the open and the close both occur near the high, the period was bullish, since prices fell and then rallied upwards. If the open and close both occur near the low, the period was bearish, since prices rose and then collapsed. Sometimes they will both open and close near the middle, which indicates a lack of decisiveness.

In all cases, the outside bar pattern indicates the psychology displayed during the trading time period. There are four obvious examples of psychology continuation or changes. If the open is low and the close is high in an uptrend, this indicates a likely continuation of the trend after an inside day of indecision. If the open is high and the close is low in an uptrend this may indicate a reversal since the inside bar represents indecision and the outside bar displays a decrease in price after a failure to push price further.

In a downtrend, an outside bar pattern where the second bar opens towards the low and closes towards the high may be a reversal. An outside bar where that opens at the high and closes towards the low may indicate a continuation after a day of indecision.

In either case, if the close is the same direction of the trend, a continuation is likely, and if it’s the opposite of the trend, a reversal is likely. The continuation or reversal of trend is not confirmed until new bars appear. These bars must display a downtrend or an uptrend to reveal your interpretation as accurate.

The outside bars, by definition, have wider trading ranges than the previous time period. This higher trading range implies higher volatility. A series of outside bars confirms growing volatility levels.

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