A candlestick formation that occurs when the entire daily price range for a given security falls within the price range of the previous day. Inside day often refers to all versions of the harami pattern and can be very useful for spotting changes in the direction of a trend.
The inside day candlestick pattern occurs when a security trades within the high and low range of the previous day. The candlestick pattern performs best as a continuation pattern during uptrends or downtrends and occurs during a period of consolidation. In some cases, traders may treat inside days as a reversal pattern, but this is much less common.
Figure 1 – Inside Day Pattern – Source: Investopedia.com
Traders should use the inside day candlestick pattern in conjunction with other forms of technical analysis to maximize its predictive power. For example, an inside day pattern may be more meaningful if it’s contained within an ascending triangle chart pattern.
Inside day patterns indicate indecision in the market as the security is unable to break out higher or lower from the previous day.
If a security has been trending higher, long traders may be taking some profit off the table and the price may be consolidating before a further move higher. The same is true for securities trending lower, where traders may cover some short positions before sending prices lower.
Many traders use the prior day’s highs or lows as an entry point for a long or short position in the security. For example, if a security is trending higher, a trader may use the prior day’s high as an entry point for a long position, assuming that the trend will continue higher.
Inside day chart patterns occur with a high frequency, which means it’s important to find instances where the trend is well-defined.
Figure 2 - DUST ETF – Source: StockCharts.com
In Figure 2, we can see a few examples of an inside day continuation pattern occurring in the Direxion Daily Gold Miners Index Bear 3X Shares (DUST) downtrend. A trader may have watched for bearish inside day patterns within the context of the downtrend and set a sell signal for the low of the prior period – or around $25.55 in this case. The trade would have been profitable if held for the ensuing days.
The inside day candlestick pattern occurs when a security trades within the high and low range of the previous day. In general, the candlestick pattern performs best as a bullish or bearish continuation pattern when used with other forms of technical analysis as confirmation. Traders should be aware that the pattern occurs very frequently and it’s important to use it in the right context to benefit from its insights.