Inbound and outbound rules in AWS security groups control which network traffic is allowed to enter or leave your resources. Inbound rules specify what incoming traffic is permitted based on protocol, port, and source IP. Outbound rules specify what outgoing traffic is allowed based on protocol, port, and destination IP. Traffic that does not match any rule is denied by default. For example, if you allow inbound TCP traffic on port 80 from anywhere, HTTP requests can reach your server. If you allow outbound TCP traffic on port 443, your server can make HTTPS requests. Traffic on ports or protocols not allowed by rules is blocked. This ensures your cloud resources are protected from unauthorized access while allowing necessary communication.