What Are Inside Days?
Inside days refer to a candlestick pattern that forms after a security has experienced daily price ranges within the previous day's high-low range. That is, the price of the security has traded "inside" the upper and lower bounds of the previous trading session. It may also be known as "inside bars." Inside days may indicate consolidation or lower price volatility.
Inside days may be contrasted with outside days, in which a day's candlestick chart exceeds the bounds of a prior day's high and low.
- Inside days occur when candlestick patterns form on a given day completely within the bounds of prior days highs and lows.
- The inside pattern indicates a smaller trading range in relation to previous days' intraday trading ranges.
- Often signaling some consolidation, series of inside days can set up indicators for trend reversals in technical analysis.
Understanding Inside Days
A candlestick chart is a popular way of visually depicting the intraday trading activity of an asset over time. A vertical line marks the day's high and low points (known as the "wick" of the candle), while the thicker "body" of the candle indicates the security's open and closing price for the trading day. An inside day occurs when the candlestick of one trading day's high and low falls within the boundaries of the prior day or days' highs and lows.
Inside days can be indicative of indecision in the market for a security, showing little price movement relative to the previous trading days. However, when several inside days occur consecutively, there is a higher probability that the stock will soon break out of its trading range, as a continuously dwindling price range is unsustainable. How it breaks out, though, cannot be determined solely by candlesticks showing inside days. The pattern of inside days must be combined with another technical analysis tool to help predict whether the break is to the upside or downside.
Trading with technical tools like candlesticks is a highly specialized practice and therefore, must be done carefully. Spotting inside days is of interest to a trader because he may believe that the subject security is setting up for some sort of move up or down. The application of another technical tool could give them sufficient confidence to place a bet on a potential pending move in the security price.
Examples of Inside Days
For example, an ascending triangle chart pattern, coupled with inside days, may foretell a bullish movement in the stock; conversely, a descending triangle is historically a bearish signal. Other common pairings with inside days as a short-term trading strategy are the relative strength index (RSI), moving average convergence divergence (MACD), and simple moving averages (SMA).
Another set is the three inside up and three inside down. These are three-candle reversal patterns, with the bullish version composed of a large down candle, a smaller up candle contained within the prior candle, and then another up candle that closes above the close of the second candle. The bearish reversal is composed of a large up candle, a smaller down candle contained within the prior candle, then another down candle that closes below the close of the second candle.