To understand price action, we can simplify every movement into one of three basic scenarios. This approach, part of a methodology known as The Strat, moves past traditional candle patterns with names like "doji" or "hammer." Instead, it focuses entirely on how the current candle's range relates to the range of the candle that came just before it. The high and low of the previous candle act as our key reference points.

An inside bar, or a "1" candle, occurs when the current candle's high is lower than the previous candle's high, and its low is higher than the previous candle's low. It fits entirely inside the prior candle's range.

This pattern signifies consolidation or balance. Buyers and sellers have reached a temporary truce, and neither side has enough force to push the price to a new high or low. Think of it as the market taking a breath before its next move. It represents a contraction in volatility.

A trending bar, or a "2" candle, is a sign of directional movement. This happens when the price breaks one of the previous candle's boundaries, but not both.

There are two kinds of "2" candles:

• 2-Up: The current candle makes a new high above the previous candle's high, but its low stays above the previous low. This shows that buyers are in control.
• 2-Down: The current candle makes a new low below the previous candle's low, but its high stays below the previous high. This means sellers are in control.

This is the most common scenario you'll see on a chart. It shows an asset is actively trending in one direction for that timeframe. The previous candle's high and low act as a simple Price Action Pivot—a break above is bullish, a break below is bearish.

An outside bar, or a "3" candle, is the most powerful signal of the three. It happens when the current candle breaks both the previous high and the previous low. Its range completely engulfs the candle before it.

This represents a major expansion in volatility and is often called a broadening formation on a chart. It signifies a fierce battle between buyers and sellers. First, one side took control (e.g., breaking the previous high), and then the other side reversed the momentum forcefully (breaking the previous low). An outside bar indicates that a significant power shift is happening, and often precedes a strong move as one side eventually wins out.

By learning to see price through this lens, you can quickly assess who is in control on any timeframe, without getting bogged down by dozens of complex pattern names. It all comes down to the relationship between just two candles.

Ready to test your knowledge of these core building blocks?

Identifying these three scenarios is the first step toward analyzing market structure with more clarity. Every combination of these candles tells a deeper story.