EURUSD spends Monday ripping through an 85 pip range, 1.0810 to 1.0895, on a jobs report. Tuesday, the entire day's action, high to low, fits inside a 30 pip band that never leaves Monday's range. Nothing about Tuesday looks exciting, which is exactly the point. An inside bar is the market pausing to digest a big move, and pauses like that tend to resolve, not persist.
The definition is mechanical, not visual
An inside bar is any candle whose high is lower than the prior candle's high, and whose low is higher than the prior candle's low. The whole thing sits inside the prior candle's range, body and wicks together. It doesn't matter whether the inside candle is red or green, big bodied or a tiny sliver; what matters is containment. The prior candle, the one doing the containing, is usually called the mother bar, and its high and low become the two levels that actually matter.
What compression is telling you
Volatility runs in cycles: expansion, then contraction, then expansion again, roughly like breathing. An inside bar is one visible contraction, a moment where buyers and sellers agree, for now, that the mother bar's range is a fair price and neither side is willing to test its edges yet. That agreement rarely lasts. The longer price coils inside a tight range, the more energy tends to release once it finally breaks one side, the same logic behind any volatility squeeze.
Two ways to trade the same setup
The breakout play treats the mother bar's high and low as a box: plan entries just beyond each edge, and trade whichever side gets taken out, with a stop back inside the box. On gold, if the mother bar ran 2,401 to 2,419, a break above 2,419 with a stop back at 2,415 defines a clean, small-risk entry. The fade play is the opposite bet: some traders sell the top of the box and buy the bottom, betting the range holds a bit longer, which only makes sense inside an established range, never inside a strong trend that's merely pausing.
Location decides which play to prefer
An inside bar appearing after a strong impulsive move, in the direction of that move, usually resolves as continuation: the breakout play, in the trend's direction, has the better odds. An inside bar appearing after a long, tired trend, at a level that's already been tested, behaves more like an exhaustion pause, and a break against the prior trend deserves real attention. An inside bar sitting in the dead middle of a range, with no trend and no level nearby, is the weakest version of this pattern: it's just quiet trading with no story to lean on either way.
Sizing the box, not guessing at it
The box itself sets the stop distance, so sizing follows the same 1% arithmetic as everything else. If EURUSD's mother bar ran from 1.0810 to 1.0895, an 85 pip range, and the breakout trigger and stop sit close together at either edge, that's a tight, cheap stop. On a $10,000 account risking $100 with an 18 pip stop beyond the box, at $10 per pip per lot, that's roughly 0.55 lots. If the mother bar is unusually wide, the same 1% risk buys a smaller position, and that's the arithmetic working correctly, not a reason to widen the stop to fit a bigger size.