Inside bars, outside bars and the doji family

The engulfing candle and the pin bar are stories about a trap that has already sprung. The three shapes in this lesson are different: they describe periods where the fight was not settled. That makes them less exciting and, used properly, more useful, because they mark the moments just before a decision.

Inside bar

An inside bar is a candle whose entire range (high and low, wicks included) sits inside the previous candle's range. The previous candle is called the mother bar.

Check: 73.00 < 73.20 and 71.90 > 70.40. Confirmed.

        |
      +---+
      |   |        |
      |   |      +---+
      |   |      |###|
      |   |      +---+
      |   |        |
      +---+
        |

     mother       inside

Who is trapped: nobody yet. That is the point. The mother bar was a decisive period (in the example, a strong bullish candle). The inside bar says the next period could not push beyond it in either direction. Buyers did not press their advantage; sellers could not reverse it. Both sides are waiting.

The information arrives when price leaves the mother bar's range. A break above 73.20 says buyers resumed; a break below 70.40 says the mother bar's buyers are now trapped and the pause was distribution. Traders who use inside bars place orders on both sides of the mother bar and let the market pick.

Inside bars are most informative on higher timeframes (daily, weekly) and after a strong directional candle. On a 1-minute chart, inside bars are everywhere and mean nothing. A run of two or three consecutive inside bars, each smaller than the last, is a compression: the range is shrinking and the eventual break tends to travel further.

Outside bar

An outside bar is the opposite: a candle whose high is above the previous high and whose low is below the previous low. It engulfs the whole previous candle, wicks included.

Who is trapped: potentially both sides, in sequence. Price went above the previous high first (trapping breakout buyers at 71.80-72.40), then reversed through the entire previous range and below its low, closing near the bottom. Everyone who bought the previous candle and everyone who bought the breakout is now losing. That is a bearish outside bar; it is a bearish engulfing candle with extra evidence, since the wicks confirm both a failed breakout and a breakdown.

The close location decides the read. An outside bar that closes in the middle of its range is a wild, two-sided period with no winner; treat it as volatility, not direction. One that closes in the top or bottom 20% has a winner.

Key idea: Inside bars mark a pause before a decision; outside bars mark a period that reversed the previous one entirely. Both are read by what happens next, not by their shape alone.

The doji family

A doji is a candle whose open and close are equal or nearly so. This course uses a body no bigger than 10% of the range. There are four named types, and only the orientation differs:

   Standard    Long-legged    Dragonfly    Gravestone

      |             |            ----           |
    -----           |              |            |
      |             |              |            |
                  -----            |            |
                    |              |            |
                    |              |          -----
                    |

The dragonfly and gravestone are pin bars taken to their limit and carry the same trapped-trader story. The standard doji, on its own, carries nothing: it says the period was balanced, and most periods on most charts are roughly balanced.

The long-legged doji is the interesting one. It shows that the period contained a large move in each direction, and both were reversed. After a strong trend, that is the first sign the winning side has stopped winning cleanly. It is not a reversal; it is the removal of certainty.

Where a doji matters

Location is everything for the doji, more than for any other shape:

• After a long run into a level: the run has stalled at a place where opposition was expected. Worth watching for the next candle.
• In the middle of a range: a doji in a range is a normal candle. Ignore it.
• As the middle candle of a three-candle reversal (morning or evening star): the pause between the trap being set and the trap springing.

A doji is a question. The next candle is the answer. Traders who buy or sell a doji on its own are guessing the answer before it is given.

A common thread

Inside bar, outside bar and doji are all defined by comparison: to the previous candle, or between open and close within the candle. None of them can be read in isolation, and none of them tells you direction on their own. What they tell you is that the market is at a decision point, which is exactly when a nearby level (Module 3) and the larger trend (Module 4) become decisive.

Try it: On a daily chart, mark the last ten inside bars. For each, record whether the mother bar was bullish or bearish and whether the eventual break went with or against the mother bar. Then do the same for any long-legged doji you can find after a run of five or more candles in one direction. Keep the tallies; you will extend this in Module 6.

Recap

• Inside bar: range entirely within the previous candle. A pause; the information arrives on the break of the mother bar.
• Outside bar: range exceeds the previous candle on both sides. Read it by close location; a close near an extreme is an engulfing candle with extra evidence.
• Doji: body ≤ 10% of range. Dragonfly and gravestone are extreme pin bars; standard doji means little; long-legged doji means both sides failed.
• None of these three has direction on its own. They mark decision points that level and trend then resolve.
• Compression (successive smaller inside bars) tends to precede larger moves.