Inside Day - Pause in Trend

Definition of an Inside Day

An inside day is when a security trades within the high and low range of the previous day.  An inside day can occur on any chart style that shows that high and low data, but it is easiest to identify with candlesticks.  An inside day is a sign to a trader that the security is taking a breather from the primary trend, or is in the early stages of a counter trend move. 

Trading Inside Days

Inside days do not provide high probability odds of determining where a security is headed over the short term.  So, if an investor is thinking about creating a trading system solely based on inside days, it will ultimately lead to lossess.  This is because an inside day candlestick is a neutral sign, where neither bulls nor bears are in control.  Traders must look to the current market environment and technical indicators in order to determine whether to go with the primary trend or to anticipate a counter move.

Going with the Trend

Inside days have the greatest odds of success when in the context of a strong trend.  A trader should look for the inside day to be relatively small and not retrace more than 50% of the body of the previous days candlestick.  This implies a pause in trend and odds are the security will continue in the direction of the primary trend.

Counters

Trading counter moves using inside days can be challenging.  A trader can increase their odds by determining if there was a volume spike on the previous day.  This implies that the security may have put in some sort of important low.  Next the inside day should retrace more than 50% of the previous days candlestick body.  This is a potential sign that the bulls are gaining steam.

Choppy Markets

Inside days should not be traded during choppy markets.  This is because the larger trend is one of indecision, so inside days only add to the confusion. 

Inside Day Trading Example

Below is an inside day chart example of the Dow Jones.  These inside days showed up before the worst one week sell off in the history of the Dow Jones.  Notice how there was a massive 777 point down day followed by three inside days.  Some traders assumed this to be a potential change in trend, while others saw it as a breather in the larget down trend.  Well, whoever put their bet on a continutation of the bear market hit a homerun.