As of 11/20/2024   Indus: 43,408 +139.53 +0.3%     Trans: 17,002 -26.31 -0.2%     Utils: 1,055 +1.25 +0.1%     Nasdaq: 18,966 -21.33 -0.1%     S&P 500: 5,917 +0.13 +0.0%	YTD  +15.2%    +6.9%    +19.7%    +26.3%    +24.1%	Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

As of 11/20/2024   Indus: 43,408 +139.53 +0.3%     Trans: 17,002 -26.31 -0.2%     Utils: 1,055 +1.25 +0.1%     Nasdaq: 18,966 -21.33 -0.1%     S&P 500: 5,917 +0.13 +0.0%	YTD  +15.2%    +6.9%    +19.7%    +26.3%    +24.1%
Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

Bulkowski on Inside Days Pattern

For more information on this pattern, read Encyclopedia of Chart Patterns Second Edition, (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.

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Updated with new performance information on 9/5/24.

Important Results Identification Guidelines Trading Tips Example Performance Statistics Inbound Price Trend versus Performance Reversal versus Continuation Performance Failure Rates Measure Rule Half Staff Trading Performance Trading Performance with Pattern Stop Trading Example Target Exit, Stock Performance   Target Exit, ETF Performance   Target Exit, Crypto Performance  See Also

Inside Day

Inside Day: Important Bull Market Results

Inside Day: Identification Guidelines

Inside Day: Trading Tips

Inside Day: Example

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.

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. 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.

Inside Day: Inbound Price Trend versus Performance

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. 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.

Inside Day: Failure Rates

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

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 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 7 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.

Inside Day: Trading Performance With Pattern Stop

Table 8 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

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.

Inside Day: Target Exit, Stock Performance

This trading setup is easy to understand. I measure the height of the inside day and double it. I add that value to the top of the pattern and the result becomes the target, where I'll sell. A stop-loss order set a penny below the bottom of the pattern provides protection. For additional methodology details, see the link.

In this example, the inside day appears in the red box.

The height of the inside days is the high minus the low, or 86 cents. Double that to $1.72 and add it to the high price to get a target of $12.68. The stock misses the exit target by a penny.

The stock drops, eventually triggering the stop-loss order for a loss.

Testing

As explained in the example above, I used a target exit placed twice as high as the height of the inside day pattern. I placed a stop loss a penny below the bottom of the pattern.

Tables 9, 10, and 11 show results for bull markets with upward breakouts and an inbound price trend either up or down. I used 497 stocks in the test.

Table 9. Based on the average profit, the inside day outperforms the benchmark. The benchmark is a two-day pattern that can include an inside day but usually doesn't. It's picked almost randomly from various places on the calendar.

The win-loss ratio is slightly higher for the inside day patterns than the benchmark. Sample counts are high, lending credibility to the results. The remainder of the table, across the columns, don't vary much.

I will say that inside days which act as reversals of the downtrend work better than do those acting as continuations of the uptrend. I get that result by comparing the gain of $62.43 for continuation patterns (upward inbound trend and upward breakout) to $77.46, which is the average gain from a downward inbound price trend and upward breakout from an inside day.

Inside Day: Target Exit, ETF Performance

The associated chart shows an example of how I tested the inside day pattern in exchange traded funds (ETFs).

The inside day appears in the red box.

The trade begins when price rises to trigger a buy stop placed a penny above the top of the inside day. That order fills at $142.28.

A stop-loss order is placed a penny below the bottom of the pattern, at $139.81.

Even though the stock broke out upward, the uptrend soon reversed and triggered the stop-loss order, handing a loss to the trader.

Testing

This is the same test as the prior one except I used 94 exchange traded funds (ETFs) instead of common stocks.

Table 10 shows that the average gain per trade is substantially higher using the benchmark than the inside day. The results suggest avoiding trading inside days in ETFs.

Inside Day: Target Exit, Crypto Performance

The chart on the right shows how I tested performance in cryptocurrencies.

The inside day is in the red square.

I placed a buy-stop a penny above the top of the inside day and a stop-loss order a penny below the bottom of the pattern.

The buy stop triggered and the currency climbed far enough to reach the two-times-height target instead of the stop-loss order. The trade ended with a profit.

Testing

This is the same test as the prior one except I used 38 crypto currency stocks instead of common stocks.

Table 11 shows that trading the benchmark results in substantially better profit than trading the same securities using an inside day. In short, avoid trading the inside day in cryptocurrencies.

-- Thomas Bulkowski

See Also

• How did I test small patterns in stocks, ETFs, and crypto currency?
• Small pattern performance.
• Updated daily list of short patterns.
• The outside day is the complement of the inside day.
• Hook reversal, downtrend
• Hook reversal, uptrend
• Key reversal, uptrend
• Key reversal, downtrend
• Open-close reversal, uptrend
• Open-close reversal, downtrend
• Pivot point reversal, uptrend
• Pivot point reversal, downtrend
• Upside weekly reversals
• Downside weekly reversals
• Inside days are small symmetrical triangles.
• Flags can act as half-staff patterns
• Pennants can also act as half-staff patterns.

Windows: Just another pane in the glass.