Consecutive inside bars

An inside bar is a bar whose range is contained within the prior bar’s range — that is, the bar’s high and low do not exceed the previous bar’s high and low. They are easy to identify visually and should be one of the basic patterns traders should notice immediately.

Inside bars by definition have lower volatility — that is, less price movement — than their preceding bars, and successive inside bars reflect progressively shrinking volatility. Per the mean-reversion theory, the more inside bars, the higher likelihood of a volatility surge or a breakout scenario.

The following volatility trade can be implemented after at least two consecutive inside bars have formed. This type of strategy is best employed on daily charts; the longer the time frame, the more significant the potential breakout.