Inside Day: Definition and Use in Trading
An inside day is a two-day price pattern in which the second day’s high is lower than the first day’s high and the second day’s low is higher than the first day’s low — in other words, the second day’s trading range is completely inside the prior day’s range. It signals a contraction in volatility and is commonly interpreted as a pause or consolidation before the prior trend resumes.
Contrast: an outside day is the opposite — the second day’s range engulfs the prior day’s range.
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Why it matters
- Inside days show reduced volatility and market indecision.
- They are often treated as continuation patterns. In a large study, the pattern continued in the same direction it entered about 62% of the time.
- Because inside days occur frequently, many carry little predictive value on their own — context and confirmation improve reliability.
How traders typically use inside days
- Identify trend alignment
- Prefer trades where the breakout direction matches the trend leading into the inside day (e.g., take long breakouts during an uptrend, short breakouts during a downtrend).
- Entry
- Long entry: buy when price breaks above the top of the two-day pattern (the prior day’s high).
- Short entry: sell/short when price breaks below the bottom of the two-day pattern (the prior day’s low).
- Stop placement
- Place a stop loss outside the pattern on the opposite side of the entry (for a long, just below the low of the two-day pattern).
- Profit management
- The pattern provides no fixed profit target. Use a trailing stop, predefined risk/reward, technical indicators, moving averages, or additional candlestick signals to exit.
Example (conceptual)
Charts often show multiple inside days clustered together or dispersed across a trend. For example, a stock may form inside days during a rally; a subsequent breakout above the pattern can resume the uptrend. Conversely, many inside days occur during sideways markets and produce false signals. Filtering for breakouts that align with the preceding price direction reduces poor signals.
Limitations and tips
- Inside days are common — treat a single occurrence cautiously.
- Combine with trend analysis, volume, support/resistance, or other technical tools to increase the probability of a successful trade.
- Consider timeframes: the pattern exists across timeframes (intraday, daily, weekly), but reliability and context vary.
Key takeaways
- An inside day is a two-bar pattern indicating a contraction in volatility and often a brief consolidation.
- It is most useful as a continuation signal when the breakout direction aligns with the prior trend.
- Use clear entry rules, a stop outside the pattern, and separate profit-exit methods; don’t rely on the pattern alone.