What is an Inside Day and How Can it Make or Break Your Trading Strategy
An inside day is a fascinating two-day price pattern. It happens when the second day’s range fits entirely within the range of the first day—the second day’s high is lower, and its low is higher compared to the first day.
Inside days are indicative of a volatility contraction and often signal a continuation of the previous price trend. While common and frequently underwhelming, their real potential shines when the larger market trend aligns favorably.
Key Takeaways
- Defining the Pattern: An inside day signifies the highs and lows of one day are within the prior day’s highs and lows.
- Interpreting the Signal: Often seen as a continuation pattern, suggesting the trend will carry on.
- Optimizing Trades: The winning trades usually align with the prior market direction.
Cracking the Code: Understanding Inside Days
Inside days are nothing extraordinary; they routinely appear on daily charts. Among the over 29,000 pattern samples analyzed by Thomas Bulkowski in his Encyclopedia of Chart Patterns, 62% saw the price continue its existing trend following an inside day. This makes recognizing the context crucial in leveraging the inside day pattern.
How to Trade Effectively Using Inside Days
Understanding the pattern is one thing, but making profitable trades out of it requires precision. Traders typically find success using it as a continuation pattern.
- Going Long: Look for a bull market setting with prices trending higher when an inside day forms. Enter the trade when the price moves above the high of the first candle.
- Short Selling: In a bear market trend, short-sell when the price dips below the low of the first candle. Make sure market dynamics are consistent with a downward trend for optimal results.
Pro Tip: Implement Smart Risk Management
Position a stop loss wisely—outside the pattern and opposite to your entry. For long trades, place the stop loss just below the low of the two-day pattern. For short trades, set it above the high.
Traders often enhance this basic strategy by using trailing stops, setting risk/reward ratios, and applying other technical indicators to discern the right exit moments.
In-Depth Example: Inside Days in Action
The Bank of America Corporation stock chart is flooded with inside days. While not every inside day initiates a substantial price movement, the winning patterns typically follow a clear direction.
The initial constructs follow an upward price trend, which continues post-pattern—a favorable structure for long trades. Conversely, inside days amidst sideways movement or without clear directional indicators often yield erratic trades that can be avoided by adhering to the principle of directional alignment.
Recalibrate your trading strategies to include inside day patterns but ensure they fit well into the larger market dynamics and align with prevailing trends for the best outcomes.
Related Terms: volatility, continuation pattern, candlestick pattern, bull market, bear market, short sell.
