ii, iii, and IOI Patterns: Recognize Candle Compression

Compression gives you boundaries to watch

When a clear trend pauses in a compact cluster, favor a breakout back in the trend's direction. The ii, iii, and IOI labels help define that cluster precisely. They do not replace the trend or turn a sideways market into a bullish one.

The extra information is a sequence of nested ranges, not a new fixed bullish or bearish meaning. Learn the two-candle comparison in Inside and Outside Bars first; here, keep track of both the innermost boundary and the larger range around it.

These structures become useful when you can answer three questions: which candles belong to the pattern, which boundary supplies the trigger, and which larger boundary still lies ahead. An inner break can occur well before price clears the whole structure.

The inside-and-outside-bar guide explains the two-candle comparisons used here. The charts below extend those comparisons across a sequence.

How to identify ii and iii

The letter i means that a candle's full high-to-low range is inside the immediately preceding candle. Count the relationships one at a time.

Label	Required relationships	Candles needed to display the complete example
ii	Two consecutive inside bars	A reference mother plus two inside bars: three candles
iii	Three consecutive inside bars	A reference mother plus three inside bars: four candles

Each new inside bar must stay within its immediate predecessor, with at least one edge moving inward under this guide's convention. A cluster remaining inside one large candle does not automatically satisfy that stricter nested pattern.

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Constructed prices. Green closes above open; red closes below. Candles 4–6 are the three inside bars.

Candle 3 is the mother, spanning 102–120. Candle 4 contracts to 105–118.8, candle 5 to 107–116, and candle 6 to 108–114. Every comparison is contained within the one immediately before it. By candle 6, the complete iii is visible.

The advance on the left supports a bullish continuation view. The last inside high is 114, while the mother high remains 120. Candle 7 closes at 117: the inner break has happened, but the outer high has not yet cleared. Candle 8 then closes at 122 and clears the mother high.

Main iii practice: use the final inside bar. Mark A = 114, the closing-break threshold, and B = 108, the cancellation low. Wait for a close above A; cancel if price breaks B first. Candle 7 confirms the inner break at 117. It still faces 120, only 3 points higher, while the distance back to 108 is 9 points before costs. This is a useful reason to pass on that late entry even with a bullish reading.

Waiting for a close above the mother high at 120 is a separate, later plan. It cannot claim an entry at 114. Do not describe candle 7 as having escaped the entire mother range.

How to identify IOI

IOI means inside, outside, inside, in that order. The three named candles need one earlier reference candle to verify the first inside relationship. A fully inspectable illustration therefore shows at least four candles.

1. The first named candle contracts within its predecessor.
2. The next candle expands beyond both ends of that inside bar.
3. The final candle contracts within the outside bar.

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Candle 1 supplies the reference. Candles 2, 3, and 4 form the IOI.

Candle 2 spans 102–113 inside candle 1's 100–115. Candle 3 expands to 101–116, exceeding both ends of candle 2. Candle 4 contracts to 104–114.5 inside candle 3. That is the complete sequence.

The final inside bar supplies the nearby references: 114.5 above and 104 below. Candle 5 closes at 116.5, clearing the final inside high and the outside high at 116. The illustrated resolution is bullish. Without the later candles or a supplied directional background, the IOI alone would describe compression after expansion, not a completed upward signal.

In an uptrend pullback at support, prioritize that upward resolution. In a downtrend rebound at resistance, prioritize a break below the last inside low. This connects the same range structure to a specific trading environment.

The common counting mistake

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The mother spans 100–115. Candle 2 spans 102–113. Candle 3 stays inside the mother at 103–114, but its high exceeds candle 2's 113. It is therefore not another inside bar. The pair does not make ii under the consecutive-nesting rule.

Use the actual relationship instead of forcing the label. This broader mother-range consolidation may still matter, but its trigger and definition should remain consistent with what is drawn.

Apply the break at the right scale

The smallest inside bar often offers the nearest trigger. It also sits inside larger ranges that may still restrict progress. Mark those ranges before judging the available space. In a large sideways market, a tight iii at the center can lead directly into the next internal obstacle.

Likewise, IOI is not an instruction to chase both sides in succession. Select the direction justified by the surrounding chart. If price breaks that way and then takes out the opposite protective boundary, the original setup has failed. A trade in the other direction requires its own location and trigger.

For the IOI practice, use the same final-inside convention: closing trigger above 114.5, cancellation below 104. The outside high at 116 is the next obstacle. Candle 5's 116.5 close crosses both highs, but the entry price is still whatever the chosen execution method obtains. Using the outside or mother low instead is an advanced variant with different risk. Use the existing risk-and-entry walkthrough for those calculations rather than silently swapping boundaries after entry.

Further reading

Brooks' glossary describes ii, iii, and IOI terminology. For a larger consolidation that keeps returning to the same prices, move to trading-range edges.