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An inside bar sits entirely within the range of the previous bar. It marks a pause, a reduction in range after a larger candle.

Traders use the pattern as a breakout setup, placing orders above and below the pair of candles. The logic is that compression precedes expansion.

Reliability varies. On a 1 minute chart, inside bars appear constantly, with little meaning. On higher timeframes, at key levels, they carry more weight.

The mother bar's size matters. A very small mother bar produces an inside bar so tiny that spread eats the potential.

Direction is again unknown. Breaking the high is no more likely than breaking the low, unless context, such as trend or a nearby level, tilts the odds.

A useful filter is to require the inside bar to form at a significant level or in the direction of the higher timeframe trend.

Without filters, the pattern is mostly noise.

How is the inside bar used here, and under what conditions does it work?

I spent a few weeks logging inside bars on the 15 minute chart for EURJPY and AUDJPY, and the context filter you mention was the whole story. Taken on their own, breaks of the mother bar went in either direction about evenly and the spread made the result negative. When I only counted inside bars that formed right at the previous day high or low, the picture changed, though mostly because those breaks failed more often than they ran.

That flipped how I use them. At a strong level, I now treat an inside bar as a place to look for a fakeout rather than a breakout. If price pokes beyond the mother bar into the level and closes back inside on the next candle, that is the trade, with the stop beyond the poke.

I also set a minimum size for the mother bar, roughly four times the typical spread on that pair. Anything smaller just produces orders sitting so close together that one wide tick triggers both sides.