Trading an Inside Day Set-Up

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Updated: 04 March 2020

An inside day is a type of candlestick pattern that forms when a candle’s price range is within the range of the previous candle.  This means the low of the current candle is above the low of the previous candle and the high of the current candle is below the high of the previous candle. The price action here is consolidating and can lead to large movements in price.

This set-up can work for any experience level and financial instrument, it works particularly well for stocks and stock options.  Trading an inside day set-up can be very successful because there are well-defined points to enter the trade and place a stop loss, but also because they tend to lead to rapid price movements, which can result in large profits.

In Figure A, you can clearly see the highlighted candle is within the prior days range.

Figure A –

Once an inside day pattern forms, you can take the trade in one of two ways (See Figure B)

To take the trade long – wait for a simple break over the inside day’s high (green line) and use the red line as a stop loss.

To take the trade short – wait for a simple break over the inside day’s low (red line) and use the green line as a stop loss.

In Figure B – You can see this trade gave almost a 4 Point move within 4 days.  Profits of course can be taken anytime in a trade like this.  If you are a swing trader, you could have held this trade for 4 days.  On day 5, a daily low was taken out, which would be a good place to exit the trade.

Figure B –

Inside day patterns work extremely well for day trading but can work for longer term investments as well.  If you are looking for a longer-term trade, you can change the time frame to weekly or monthly candles – Inside weeks and inside months can also lead to huge breakouts. By looking at a longer time period you can average-out some of the day-to-day price fluctuations the market can serve up and simply focus on your target price.

Inside week patterns work exactly the same way,  as you can see in figure C. You could either go long or short on this trade.  To go long you would enter the trade at the green line and place your stop at the red line. To go short you would do the opposite, entering the trade at the red line with a stop loss at the green line.  The trade would start with the break of the green line (or the red line if you are shorting) and you can stay in the trade as long each weekly candle did not take out a prior week’s low.

Figure C –

The trade shown in figure C looks pretty easy; a giant green candle, followed by another green candle the next week – a $14 point move.  Figure D shows the same trade – but in the shorter daily time frame.  The white box shows the same weekly candle from figure C that broke out of the inside range.  As you can see the price fluctuations make the pattern much less clear; the original breakout didn’t happen for two days.  The following two days were red and the next week started with two huge green candles.  Weekly candles really help here because they even out fluctuations in the daily candles.

Figure D –

In closing, the inside candle pattern is a very easy trade to execute that can lead to very quick profits.  It is very important to study the same chart on multiple time frames and always follow your own trading plan.  Inside candle patterns work on all time frames, and can be very effective in managing a day trade on a 15 minute, 30 minutes, or 60 minute chart.