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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's Inside Days

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For more information on this pattern, read Encyclopedia of Chart Patterns Second EditionEncyclopedia of Chart Patterns 2nd Edition book., (a later edition is pictured), pages 343 to 355. That chapter gives a complete review of the chart pattern, including tour, identification guidelines, focus on failures, performance statistics, and trading tactics. Below is updated performance information based on tests in January 2013. Also note that this pattern is only in the first edition of the Encyclopedia.

 

The Inside Day pattern
Inside Day

 

Important Bull Market Results for Inside Days

Overall performance rank (1 is best): 10/23
Break even failure rate*: 32% (up breakouts)
Average rise*: 10%
Percentage meeting price target*: 80%
 
The above numbers are based on hundreds of perfect trades as of 1/29/2013. See the glossary for definitions.
* Based on the trend high, not the ultimate high. See text.
** From the first edition of my Encyclopedia of Chart Patterns.
** Based on the average rise compared to other small patterns with upward breakouts in a bull market

Inside Day Identification Guidelines

CharacteristicDiscussion
Price trendThere is no requirement of a price trend leading to the inside day. However, the trend is upward 53% of the time.
2 daysInside days are a two-bar pattern.
ShapeLook for a lower high and higher low on the second day. The price bar fits inside the prior day's range.
Last BarThe last bar cannot have the high price equal to the low price. In other words, it cannot be a four price doji (open = high = low = close price).

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Inside Day Trading Tips

Trading TacticExplanation
ContinuationThe pattern acts as a continuation 62% of the time.
BreakoutA breakout occurs when the stock closes either above the top of the pattern or below the bottom of it.
Trade with the trendSince inside days act as a continuation pattern, expect the breakout to be in the same direction as the inbound price trend.
BreakoutWait for price to either close above the top or below the bottom of the pattern before taking a position.
Half-staffThe inside day can form midway in a price trend, just like flags and pennants.

Inside Day Example

Inside Day in 3M

I show two inside day patterns in 3M (MMM).

Notice in both patterns that the second day has a smaller trading range than the first day and that the second day fits inside the first day. That's how the inside day is supposed to look.

The November inside day acts as a continuation pattern. Price entered the inside day from the bottom and exits out the top, continuing the upward price trend.

The second inside day (in December) acts as a short-term reversal. Price enters the pattern trending down and exits the pattern moving up.

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Inside Day Performance Statistics

For the following statistics, I used 1,260 stocks, starting from December 1989 to January 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. Since samples were numerous, I accepted only one in ten samples. Nevertheless, that gave me 29,641 samples. There were two bear markets in the 2000s (as determined by the S&P 500 index), from 3/24/2000 to 10/10/2002 and 10/12/2007 to 3/6/2009. Everything outside of those dates represents a bull market.

For each inside day pattern, I found where the trend started and when it ended. To find the trend peak or valley, I found the lowest valley and highest peak within plus or minus 10 days (21 days total) each, before the inside day and the same peak/valley test after the inside day. The closest valley or peak before the inside day is where the trend began. The closest peak or valley after the inside day is where the trend ended.

The 10-day peak or valley number tends to find major turning points.

I measured performance from the breakout price (the first day's high or low in the pattern, depending on the breakout direction) to the nearest trend peak or trend valley after the breakout.

Table 1: Performance After the Inside Day Pattern
 Market Type, Breakout Direction  1990s  2000s  2010s 
Bull market, up breakout11%10%9%
Bull market, down breakout-9%-7%-8%
Bear market, up breakoutN/A11%N/A
Bear market, down breakoutN/A-16%N/A

Table 1. What I find interesting in this table is the gradual performance deterioration of inside days over time. In the 1990s, an upward breakout from inside days averaged a gain of 11%, excluding dividends, trading commissions, fees and so on. In the 2000s (bull market only), the average gain dropped to 10%. For the 1,801 samples in the 2010s, the average gain is just 9%.

To put this in a wider context, it is 18% harder to make money today than it was in the 1990s! To put it another way, the average market trend is 18% shorter today than it was two decades ago.

This is not a new finding. I reported similar behavior in a recent study.

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Inside Day: Inbound Price Trend versus Performance

Table 2: Performance vs Inbound Trend
 Up
 Trend 
Down
 Trend 
Bull market, up breakout11%10%
Bull market, down breakout-7%-9%
Bear market, up breakout11%10%
Bear market, down breakout-15%-17%

Table 2 shows the performance of stocks after the inside day pattern when sorted by the direction of the inbound price trend. The results include all samples, sorted by a bull or bear market.

For example, if price is trending upward leading to the inside day and the pattern has an upward breakout, the average gain in a bull market is 11%. The inside day acts as a continuation pattern (a continuation of the up trend). Oddly the market type (bull or bear) did not influence upward breakout performance.

If the inbound trend is up but the breakout is down (meaning the inside day acts as a reversal), the average drop measures 7% in a bull market but 15% in a bear market.

Inside Day: Reversal versus Continuation Performance

Table 3: Performance vs Reversal or Continuation
  Reversal  Continuation 
Bull market, up breakout10%11%
Bull market, down breakout-7%-9%
Bear market, up breakout10%11%
Bear market, down breakout-15%-17%

Table 3. Which perform better, continuations or reversals? The table shows the answers sorted by market condition and breakout direction..

In all types of market conditions (bull or bear) and breakout directions (up or down), inside days that act as continuations of the price trend outperform reversals.

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Inside Day Failure Rates

Table 4: Failure Rates
  5% Failure  Average 
 Rise/Drop 
Bull market, up breakout32%10%
Bull market, down breakout39%-8%
Bear market, up breakout27%11%
Bear market, down breakout21%-16%

Table 4 shows the failure rate sorted by market condition and breakout direction along with the average rise or decline for the associated conditions.

For example, in a bull market after an upward breakout, 32% of inside days fail to see price rise at least 5%. That's huge. Long chart patterns (such as double bottoms), often have failure rates in the single digits, but performance is measured differently (the performance numbers listed in these tables measure from the breakout to the trend high or low, which is often the first major high or major low. Double bottoms look for a 20% trend change to end the trend. That's a big difference).

Another example from the table shows that 21% of inside days fail to drop at least 5% after a downward breakout in a bear market. That is the lowest failure rate in the table. That makes sense since the average drop is 16%. The highest failure rate is 39% and the average drop is just 8%.

Inside Day Measure Rule

Table 5: Measure Rule Performance
  Success 
Bull market, up breakout80%
Bull market, down breakout72%
Bear market, up breakout74%
Bear market, down breakout77%

The measure rule is simply the height of the chart pattern added to the top of the pattern (for upward breakouts) or subtracted from the bottom of the chart pattern for downward breakouts. Table 5 shows how often this rule works for inside days.

The best performance comes when the breakout direction agrees with the market trend. That is, upward breakout in a bull market or downward breakout in a bear market. The rule works 77% to 80% of the time.

Making a contra-trend trade results in inferior performance with the measure rule working between 72% and 74% of the time. In other words, go long in a bull market and short in a bear market. There's your proof that it helps.

Inside Day Half Staff

Table 6: Half-Staff Position
  Success 
Bull market, up breakout52%
Bull market, down breakout53%
Bear market, up breakout54%
Bear market, down breakout51%

Table 6 shows where in the price trend the inside day appears. A value of 50% is the best since it's midway along the trend. The trend measures from the trend star to the trend end. You can think of this as swing low to swing high with the inside day somewhere near the middle.

The table shows that inside days, where the pattern acts as a continuation of the trend (not a reversal) is near the middle of the trend. The numbers are averages but with such a high sample count, the median values are similar.

Inside Day Trading Performance

Table 3: Testing the Inside Day
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$79.82$(75.73)$(66.81)$76.38
Wins57%43%46%54%
Winning trades7,0824,8371,3151,665
Average gain of winners$703.73$747.62$715.21$768.75
Losses43%57%54%46%
Losing trades5,3756,3491,5141,445
Average loss($742.23)($703.00)($746.03)($721.40)
Average hold time (calendar days)28251613

Table 3 shows the performance based on 29,582 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No adjustments were made for interest, fees, slippage and so on.

The results are sorted by bull or bear market, up or down breakouts. The trades used the same setup as listed in Inside day Performance Statistics.

Here's the setup.

  • Find an inside day.
  • If price closes above the pattern's high, buy at the open the next day.
  • If price closes below the pattern's low, short at the open the next day.
  • Sell/cover when price moves 7% in the direction of the breakout.
  • If price moves 7% in the direction opposite the breakout, close out the trade for a loss.

For example, in a bull market after an upward breakout from an inside day, the net gain was $79.82 for all trades. The method won 57% of the time and there were 7,082 winning trades. The average gain of winning trades was $703.73.

Forty-three percent, or 5,375 trades were losers. They lost an average of $742.23.

The average hold time was 28 calendar days.

Notice how the gains and losses were pegged near 7%, which is how the test was setup.

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Inside Day Trading Performance With Pattern Stop

Table 4: Testing the Inside Day with Pattern Stop
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$55.28$(38.60)$(45.96)$67.83
Wins47%38%47%54%
Winning trades5,9154,2661,3221,680
Average gain of winners$705.51$743.87$712.48$766.51
Losses53%62%53%46%
Losing trades6,5806,9421,5071,429
Average loss($529.23)($519.45)($711.28)($754.75)
Average hold time (calendar days)19161412

Table 4 shows the results of 29,641 trades, but this time, a penny below the bottom of the inside day pattern (upward breakout) or a penny above the top of the inside day pattern (downward breakout) was used as a stop instead of a 7% stop.

For example, in a bull market after an upward breakout from an inside day, the net gain was $55.28 for all trades. The method won 47% of the time and there were 5,915 winning trades. The average gain of winning trades was $705.51.

Fifty-three percent, or 6,580 trades were losers. They lost an average of $529.23.

The average hold time was 19 calendar days.

When compared to the 7% stop method, losses were cut dramatically but only in a bull market. The net profit improved in two cases and became worse in the other two.

Inside Day Trading Example

Inside day in 3M

The figure shows a inside day pattern in 3M (MMM) on the daily scale.

The inside day is squeezed between red lines A and B.

Line B represents the buy price, when price closes above the top of the inside day (buy at the open the next day). Seven percent above the buy price is the target, C. The stock easily reaches that.

To put prices to the locations, the opening price after the close above line B is 91.37 and C, 7% higher, is at 97.77.

If the upward breakout failed, a drop of 7% below the buy price would be the stop location.

If you use a pattern stop, line A represents a penny below the bottom of the chart pattern.

-- Thomas Bulkowski

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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Windows: Just another pane in the glass.