As of 10/21/2024   Indus: 42,932 -344.31 -0.8%     Trans: 16,190 -193.01 -1.2%     Utils: 1,061 -6.15 -0.6%     Nasdaq: 18,540 +50.49 +0.3%     S&P 500: 5,854 -10.69 -0.2%	YTD  +13.9%    +1.8%    +20.3%    +23.5%    +22.7%	Targets    Overview: 10/11/2024     43,500 or 41,600 by 11/01/2024   16,800 or 15,700 by 11/01/2024   1,075 or 1,000 by 11/01/2024   19,000 or 17,600 by 11/01/2024   5,900 or 5,675 by 11/01/2024
Chart Pattern Indicator: on 10/21/24

As of 10/21/2024   Indus: 42,932 -344.31 -0.8%     Trans: 16,190 -193.01 -1.2%     Utils: 1,061 -6.15 -0.6%     Nasdaq: 18,540 +50.49 +0.3%     S&P 500: 5,854 -10.69 -0.2%	YTD  +13.9%    +1.8%    +20.3%    +23.5%    +22.7%
Targets    Overview: 10/11/2024     43,500 or 41,600 by 11/01/2024   16,800 or 15,700 by 11/01/2024   1,075 or 1,000 by 11/01/2024   19,000 or 17,600 by 11/01/2024   5,900 or 5,675 by 11/01/2024
Chart Pattern Indicator: on 10/21/24

Bulkowski on Outside Days Chart Pattern

For more information on this pattern, read Encyclopedia of Chart Patterns Second Edition, (a later edition is pictured), pages 404 to 416. 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 9/6/24.

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

Outside Day

Outside Day: Important Bull Market Results

Outside Day: Identification Guidelines

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Outside Day: Trading Tips

Outside Day: Example

I shows two outside days on the daily chart.

The first outside day occurs in early December when the stock makes a wider trading range than the prior day. Price trends upward leading to the outside day and breaks out upward, too. That means this pattern acts as a continuation pattern. The breakout occurs when price closes above the top or below the bottom of the two-day pattern.

The late December outside day acts as a reversal. Price enters the pattern from the top and exits (breaks out) out the top, too.

Notice that the early December outside day is midway in the run from the November bottom to mid December peak.

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Outside Day: Performance Statistics

For the following statistics, I used 1,258 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 29,725 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. At the time this article was written, there were no bear markets in the 2010s (and none in the 1990s). I placed N/A in the table accordingly.

For each outside 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 outside day and the same peak/valley test after the outside day. The closest valley or peak before the outside day is where the trend began. The closest peak or valley after the outside 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 second 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 outside days over time. In the 1990s, an upward breakout from outside days averaged a gain of 10.2%, excluding dividends, trading commissions, fees and so on. In the 2000s (bull market only), the average gain dropped to 10.0%. For the 2,134 samples in the 2010s, the average gain is just 8.9%.

To put this in a wider context, it is 13% harder to make money today than it was in the 1990s! To put it another way, the average market trend is 13% shorter today than it was two decades ago. Other chart patterns, such as the shark-32 and inside day show larger values.

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

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Outside Day: Inbound Price Trend versus Performance

Table 2 shows the performance of stocks after the outside 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 outside day and the pattern has an upward breakout, the average gain in a bull market is 10%. The outside 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 outside day acts as a reversal), the average drop measures 7% in a bull market but 14% in a bear market.

Outside 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), outside days that act as continuations of the price trend outperform reversals.

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Outside 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 outside 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 outside 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 40% and the average drop is just 8%.

Outside 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 outside 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 78% to 82% of the time.

Making a contra-trend trade results in inferior performance with the measure rule working between 73% and 75% 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.

Outside Day: Half Staff

Table 6 shows where in the price trend the outside 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 outside day somewhere near the middle.

The table shows that outside 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.

Outside Day: Trading Performance

Table 7 shows the performance based on 29,678 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 Outside Day Performance Statistics.

Here's the setup.

• Find an outside 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 outside day, the net gain was $90.16 for all trades. The method won 58% of the time and there were 7,142 winning trades. The average gain of winning trades was $702.71.

Forty-two percent, or 5,273 trades were losers. They lost an average of $739.51.

The average hold time was 29 days.

Notice that gains and losses hovered around 7%, which is how the test was structured.

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Outside Day: Trading Performance With Pattern Stop

Table 8 shows the results of 29,773 trades, but this time, a penny below the bottom of the outside day (upward breakout) or a penny above the top of the outside day (downward breakout) was used as a stop instead of a 7% stop.

In a bull market, the average loss dropped substantially when compared to the 7% loss setup. In a bear market, the loss also narrowed, but not as dramatically. However, the win/loss ratio deteriorated, making the net gain marginally better in two cases and worse in two cases.

Outside Day: Trading Example

The chart shows an example of how the performance was measured on the daily chart in 3M (MMM).

The outside day is shown in the inset. The buy price is at the opening price the day after the stock closes above the top of the taller of the two bars (A). That is at a price of 94.19. Adding 7% to this gives a target (C) of 100.78.

Had the upward breakout turned down before reaching C, a stop 7% below the buy price (87.60, not shown) would have closed out the trade.

If using the pattern stop, a penny below the low at B would serve as a stop.

Outside Day: Target Exit, Stock Performance

Trading using a target exit is simple to explain. Look at the adjacent chart.

I highlight the outside day in the red box. I'm only concerned with upward breakouts in a bull market. I'm looking for price to rise above the top of the outside day, so I'll have a buy stop priced at a penny above the top of the last price bar in the outside day (the tall price bar). I'll place a stop loss order a penny below the bottom of the outside day, also at the tall bar.

Then I wait for the action to begin. In this example, the buy stop triggered an entry. I set a target price to sell at twice the height of the pattern added to the top of the outside day.

In this example, the stock didn't come close to the exit price. Instead, the trade was stopped out for a loss.

For a more detailed explanation of the method I used to test the outside day, see the link.

Testing

As explained in the example above, I used a target exit placed twice as high as the height of the outside 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. The outside day pattern in stocks and in an uptrend substantially outperforms the benchmark (average profit line: $66.29 to $48.01). The win-loss ratio is also better at 43%.

For the outside day pattern in a downtrend, you'll want to avoid it. The benchmark outperforms it by a small margin of profit, $68.70 to $59.72 per trade.

Outside Day: Target Exit, ETF Performance

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

Again, the red square shows the outside day. The day after the pattern ends, we have an upward breakout. It may not be clear from the chart that price rose above the top of the pattern, but it did, triggering a buy stop placed there.

A stop loss a penny below the bottom of the outside day helps limit the effects of adverse moves.

Computing the height of the outside day, added to the top of the pattern, gives a target price at which to exit. As you can see, the ETF climbed far enough to touch the horizontal red line and close out the trade.

Testing

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

Table 10. In both breakout directions, the benchmark beat the performance of the outside day. It suggests you don't trade the outside day in exchange traded funds.

Outside Day: Target Exit, Crypto Performance

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

Here's a outside day in the cryptocurrency, AAVE.

The square highlights the outside day.

This chart is another example of a failure. The currency breaks out upward but quickly reverses and triggers a stop-loss order placed a penny below the bottom of the outside day.

Testing

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

Table 11. The outside day is a dismal failure in cryptocurrencies. It gets walloped in downtrends (leading to the start of the outside day), by $147.18 (benchmark) to $78.15 (outside day). The benchmark wins more often than the outside day pattern, too.

-- Thomas Bulkowski

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See Also

• Flags can act as half-staff patterns
• Pennants can also act as half-staff patterns.

Below are other short patterns...

• Inverted gap2H
• Upside weekly reversals
• Downside weekly reversals
• Inside Days
• Shark-32

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