Definition, trading strategy, examples, vs. Outside

What are inside days?

Intradays are represented by a candlestick pattern that forms when a security has a daily price range within the previous day’s high-low range. Candlestick patterns are price charts used in technical analysis to display a security’s high, low, opening and closing prices for a specific time period. Traders use these patterns to predict price movements based on historical trends. Therefore, when a security trades “within” the upper and lower limits of the previous trading session, it may mean that the price is consolidating, that is, moving within stable limits without a clear tendency to continue.

Inside days can be contrasted with outside days when the day’s candlestick chart goes beyond the boundaries of a previous day’s high and low. An outside pattern indicates increased market volatility. If an outside day occurs after a long-term trend, it can be a strong signal that the trend is losing momentum, and a reversal could be imminent, although it depends on the context.

Understand Within days

A candlestick chart is a popular way to visually depict the intraday trading activity of an asset over time. A vertical line indicates the day’s highs and lows (known as the “wick” of the candle), while the thicker “body” of the candle indicates the security’s opening and closing price for the trading day. An intraday occurs when the candlestick of one trading day’s high and low falls within the boundaries of the previous day or days’ highs and lows. Examples of inner days are marked on the example chart below.

Within days, uncertainty in the market can indicate a security, which shows little price movement relative to the earlier trading days. But when several intradays occur in a row, it is more likely that the stock will soon break out of its trading range, as a constantly declining price range is unsustainable. However, the direction of the breakout cannot be determined just by looking at this chart pattern. Instead, it should be matched with other technical analysis tools to predict whether the breakout will be upward or downward.

The interpretation of trading charts such as candlesticks is a highly specialized practice and must be done carefully. Within days interest traders because they believe this is when the security is getting ready for a move up or down. After reviewing other technical analysis tools, traders can then have enough confidence to make a play on the movement of the security price.

Examples of Inner days

Let’s look at a hypothetical example to illustrate an inside day. Suppose these are the results of a stock trade over two consecutive days:

Day 1: The stock opens at $50, reaches a high of $55, falls to a low of $48, and then closes at $52. Day 2 (the intraday): The stock opens at $51, climbs to a high of $54 , falling to a low of $49, and closing at $53.

In this example, Day 2 is an inside day because its entire price range (high of $54 and low of $49) is within the price range of Day 1 (high of $55 and low of $48). This pattern indicates a consolidation in the stock’s price, indicating some indecision among investors.

For those who know other aspects of technical analysis, other patterns can help interpret this candlestick pattern. For example, an ascending triangle chart pattern, along with intradays, can precede a bullish move in the stock. Conversely, a descending triangle is historically a bearish signal. Other common intraday pairings as a short-term trading strategy are the relative strength index (RSI), moving average convergence divergence (MACD) and simple moving averages (SMA).

Additional patterns to look at are known as the three inside up and three inside down cards. These are three-candle reversal patterns, with the bullish version having a long down candle, a smaller up candle in the previous candle, and then another up candle that closes above the end of the second candle. The bearish reversal has a long up candle, a smaller down candle in the previous candle, and then another down candle that closes below the end of the second candle.

How to trade the intraday pattern

Trading the intraday chart pattern involves recognizing a specific pattern in price charts and using it to make more informed trading decisions. It also requires a strategy that takes advantage of potential price movements, either bullish or bearish, according to the pattern.

Within days in bullish markets

When identifying an intraday pattern, you need to determine whether the overall market or specific security is bullish. This can be confirmed by analyzing longer-term charts to confirm the prevailing trend as upward. The trading strategy also involves waiting for a price breakout of this pattern. In a bullish market, traders look for prices to break above the intraday high.

Generally, an entry point will be set when the price breaks above the high of the intraday pattern. Some traders wait for the closing price to be above the high to confirm the breakout. As a risk management technique, traders will also place a stop loss order just below the low of the intraday or at a predetermined percentage or price point to limit potential losses if the market moves against the position. Additionally, a profit target can be set based on previous resistance levels, a specific risk-reward ratio or other technical indicators.

Traders will also integrate technical analysis tools such as moving averages, the RSI or MACD to confirm and refine their entry and exit points. Indeed, while technical analysis patterns such as intraday patterns can be a powerful tool, there are risks. Traders should also conduct thorough research and combine technical analysis with other techniques, such as fundamental and quantitative analyses, for a more comprehensive approach.

Intraday in Bearish Markets

Similar to bullish markets, the pattern must be identified initially. Also, before considering the trade, traders must confirm that the market or security is in a bearish trend. This can be done by examining longer-term charts, such as weekly or monthly charts, to determine that the overall direction is down.

Indeed, traders consider it critical that when they are in a bearish market, there should be a pause in execution until the price breaks out of the intraday pattern. Specifically, traders will look for the price to break below the low of the intraday. This breakdown may indicate that the bearish trend will continue.

Generally, traders will enter a short position when the price breaks below the low of the intraday pattern. Some traders may also prefer to wait for the daily close to be below the low to confirm the breakdown. To manage risk, traders will place a stop loss order just above the intraday high or at a predetermined percentage or price point. This limits potential losses if the market unexpectedly moves higher instead of lower.

Traders will determine a profit target based on previous support levels, a specific risk-reward ratio or other technical indicators. Likewise, in bull markets, while patterns such as the intraday can provide valuable trading signals, these patterns are not infallible and should be part of a comprehensive trading strategy.

The Bottom Line

The intraday chart pattern is a technical analysis tool, characterized by a security or index’s price range remaining within the previous day’s range, indicating possible market indecision and an upcoming breakout. Effective trading strategies typically combine trend analysis and other technical indicators to validate the breakout direction. Traders usually use this pattern with the prevailing market trend, setting clear entry points, stop loss orders and profit targets. However, its effectiveness can be limited by false breakouts and market sensitivity, highlighting the importance of integrating it into a well-rounded trading approach that includes comprehensive market analysis and robust risk management practices.

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