What Does an Inside-Day Pattern Mean?
The inside-day pattern is that the price range for the second day is precisely the same as the first day’s. The second day’s high point is lower than the first day’s, and the second day’s low point is higher than the first.
Inside days show less volatility and are often a sign of a continuation trend. After an inside day, the price will often keep moving like before the pattern. Still, the pattern is typical and usually not necessary.
You can compare inside days to outside days.
Figuring Out Inside Days
Inside days happen a lot. They may happen more than once a month for many assets on a daily chart. If there are a lot of inside days, the price won’t move much, following the trend, so traders won’t learn much from them.
When volatility drops from one day to the next, it’s called an “inside day.” The market is pausing. This is one reason why the pattern is often called a continuation pattern. Thomas Bulkowski wrote in the Encyclopedia of Chart Patterns that the price went the same way 62% of the time after entering the pattern. This was true for more than 29,000 examples of the pattern.
People who want to trade the pattern usually do best when they trade it as a continuation pattern. For instance, if you want to buy a stock, the market should be bullish; the stock should go up when it makes an inside day, and the price should go up when it breaks out of the pattern.
Traders could buy when the price goes above the pattern’s top, which is the high point of the first candle in the two-bar pattern.
The trader would short-sell when the price fell below the pattern’s low point. In a bear market, the short should line up with the price decreasing during the inside day. The price should then break below the two-bar pattern.
Outside the pattern, a stop-loss is set up on the other side of the entry. The stop-loss is set just below the low of the two-day trend if you are going long.
Setting a profit goal for the inside-day routine is impossible. There are other ways for traders to make money, like using a trailing stop loss, a risk/reward ratio, an indicator or moving average, or watching for other candlestick patterns that mean it’s time to get out of the trade.
A Case of an Inside-Day Pattern
The following chart shows how the price of Bank of America Corporation stock has changed several times. This trend can happen a lot. Not every inside day leads to a significant price change that follows the trend.
When prices go up, the first two trends show up. After that, the price goes above the pattern and keeps going up. This is the framework that you want for a long trade.
Some start with a price rise or fall for the days inside that period, while others see the price mostly staying the same. It would have been better for traders if they only made trades when the breakout happened in the same way as the price trend before the two-day pattern.
Conclusion
- When one day’s high and low are inside the previous day’s high and low, this is called an “inside day” on a technical chart.
- People think that inside days show a continuation pattern.
- The best trades to make when trading a breakout from the pattern are ones where the general market direction lines up with the direction into and out of the two-day pattern.
