DEFINITION of 'Outside Days'
Outside days are days where a security’s price is more volatile than the previous day as evidenced by a higher high and a lower low. The term is commonly used among market technicians and day traders using candlestick charts to predict future price movements.
BREAKING DOWN 'Outside Days'
What is an Outside Day?
Outside days are a two-bar candlestick pattern that occurs when the current day’s candle has a higher high and a lower low than the prior candle. Unlike bullish or bearish engulfings, outside days look at an entire candlestick – including its shadows – instead of just the body. All bullish and bearish engulfings are outside days, but not all outside days are engulfings. The distinction is important when it comes to reading into what the pattern means.
The pattern shows that volatility is on the rise. If the second candle has a long body, the pattern shows that traders have made a definitive choice about the future direction of the stock. If the second candle has long shadows, the pattern indicates that there may be a high level of indecision in the marketplace. These factors should be considered in the overall context of what’s happening with a security’s price to predict where prices may be headed.
Outside days perform best as a continuation pattern in the direction of the latest candlestick. For example, a bullish outside day occurring during an uptrend is a signal that the uptrend is to continue. However, outside days can also act as reversal patterns depending on the context. Traders should always use outside days along with other technical indicators or chart patterns, such as the RSI or MACD indicators or ascending or descending triangles.
Examples of Outside Days
The first example (below) is an outside day in the S&P 500 SPDR (SPY). Since the candlestick’s body engulfed the prior day, the pattern was also a bearish engulfing, which suggests downside ahead. The key point to note here is that the volume was relatively light, which means that the pattern had a relatively weak signal for traders. The subsequent increase in price shows why it’s important to look at other technical indicators when using outside days.
The second example (below) shows a bullish outside day pattern in Alphabet Inc. (GOOGL). In this case, the outside day (and bullish engulfing) had a long candle body, which provided a stronger bullish signal than outside days with long shadows. Shares of the stock rose significantly over the ensuing couple of days and the patterns prediction was successful.
The Bottom Line
Outside days are two-bar candlestick patterns that occur when the current day’s candle has a higher high and lower low than the prior candle. Often times, outside days double as bullish or bearish engulfings, but that isn’t always the case. Traders should always use outside days alongside other technical indicators or chart patterns to maximize their odds of success.