Unleash Your Trading Potential with Outside Days
Outside days are characterized by a security’s price demonstrating more volatility than the previous day. An outside day occurs when a security’s price reaches both a higher high and a lower low compared to the prior day. This two-day pattern shows that the difference between the open and close on the second day is wider, and both figures fall outside the range of the first day’s open and close.
The concept of outside days is often utilized by market technicians and swing traders focusing on short-term price fluctuations. The antithesis of an outside day is termed as an inside day.
Key Insights to Power Your Trading Decisions
- Expanding Price Action: An outside day has a price action showcasing a higher high and a lower low than the previous day.
- Range Extension: It involves an open and close that both lie outside the prior day’s open and close range.
- Reversal Signal: If price bars move in opposite directions, it’s known as an outside reversal.
- Importance of Context: Traders consider factors like trading volume, existing trends, and the price bar directions within the pattern.
Deep Dive into Outside Days
Outside days are a significant two-bar chart pattern indicating increased volatility. The subsequent day’s longer price bar signifies higher activity from buyers or sellers, hinting at future price directions. A downward second bar suggests seller dominance, while an upward second bar indicates buyer strength.
These patterns often signal trend continuations. For instance, a bullish outside day during an uptrend suggests the uptrend may persist. Conversely, an outside day could act as a reversal if it trends opposite to the previous price direction.
Recognizing Trading Magic in Outside Days
- Bullish Continuation: In an uptrend, a second bar pointing up confirms ongoing bullish sentiment.
- Bearish Warning: A second downward bar in an uptrend warns of potential trend stalling.
- Downtrend Continuation: In a fall, continued downward bars uphold the bearish momentum.
- Reversal Watch: A rising second bar in a downtrend hints at a possible uptrend reversal.
For more accuracy, traders might observe the third day’s price direction following an outside day to guide trade entries and exits. High trading volume reinforces conviction, while low-volume days may warrant caution.
Real World Example: Exploring Outside Days
Let’s examine this practical example on an Amazon.com Inc. (AMZN) one-year daily chart. Several outside days are marked:
In this example, outside reversal patterns failed to disrupt the broader uptrend, showing the necessity of confirmation. Consistent uptrend continuation patterns signal positive momentum without dramatic price declines.
These examples underscore why traders look beyond apparent patterns; understanding volume, context, and subsequent price action offers superior trading insights.
Related Terms: Bearish Engulfing Pattern, Bullish Engulfing Pattern, Uptrend, Downtrend, Volume.
