Last Updated on 30/03/2023 by Ndanileka
WHAT IS AN INSIDE DAY
The Inside Day is a technical chart pattern indicating a period of market consolidation. This pattern occurs when the trading range of a given day, including its high and low prices, is entirely contained within the high and low prices of the previous day. It signifies that the market is experiencing a contraction, as participants are indecisive or cautious, leading to a narrowing of the trading range.
IDENTIFYING AND UNDERSTANDING AN INSIDE DAY
To identify an Inside Day, you can use the four price points mentioned: Today’s High, Today’s Low, Yesterday’s High, and Yesterday’s Low. Here’s how:
- Today’s High (TH): The stock’s highest price during today’s trading session.
- Today’s Low (TL): The stock’s lowest price during today’s trading session
- Yesterday’s High (YH): The stock’s highest price during yesterday’s trading session.
- Yesterday’s Low (YL): The stocks’ lowest price during yesterday’s trading session.
To determine if an Inside Day has occurred, you can compare these price points using the following conditions:
- Today’s High (TH) should be lower than Yesterday’s High (YH), meaning TH < YH.
- Today’s Low (TL) should be higher than Yesterday’s Low (YL), meaning TL > YL.
If both conditions are met, it indicates an Inside Day has occurred.
INSIDE-DAY GOOGLE SHEETS FORMULA
In the below example, Cell B1 = ”CVS ” ( CVS Health )
Step 1 Request four price points.
Today’s High, Today’s Low, Yesterday’s High, Yesterday’s Low.
Step 1.1 Request Today’s High
Step 1.2 Request Today’s low
When automating historical price requests, it’s essential to structure the formula in a manner that accommodates holidays and weekends, ensuring the accurate time period is consistently “queried.”
Read through the historical data article to learn more.
Step 1.3 Request Yesterday’s High
=QUERY(GOOGLEFINANCE(B1,"high",TODAY()-6,TODAY())," SELECT Col2 ORDER BY Col1 DESC LIMIT 1 LABEL Col2''")
Step 1.4 Request Yesterday’s Low
=QUERY(GOOGLEFINANCE(B1,"low",TODAY()-6,TODAY())," SELECT Col2 ORDER BY Col1 DESC LIMIT 1 LABEL Col2''")
Step 2 Create a logical expression for the high and low
The next step of the formula is to check if the conditions for an inside are met by using the IF() function to create a logical expression.
Step 2.1 Create a logical expression for the high.
=IF ( Step 1.1 < Step 1.3),1,0 )
The comparison is expressed as, “If Today’s high is less than yesterday’s high return, 1.”
=IF((GOOGLEFINANCE(B1,"high"))<(QUERY(GOOGLEFINANCE (B1,"high",TODAY()-6,today())," SELECT Col2 ORDER BY Col1 DESC LIMIT 1 label Col2''")),1,0)
Step 2.2 Create a logical expression for the low.
=IF ( Step 1.2 > Step 1.4),1,0 )
The comparison is expressed as, “If Today’s Low is greater than yesterday’s Low return, 1.
=IF((GOOGLEFINANCE(B1,"low"))>(QUERY(GOOGLEFINANCE (B1,"low",TODAY()-6,today())," SELECT Col2 ORDER BY Col1 DESC LIMIT 1 label Col2''")),1,0)
Step 3 Compte Inside Day formula
The formula below checks if 2.1 & 2.2 “return” 1 using the AND() function. If both conditions are true, it returns “Inside Day” otherwise, it returns ” ” (blank).
=IF(AND( step 2.1, step 2.2),1,0)
=IF(AND(IF((GOOGLEFINANCE(B1,"high"))<(QUERY(GOOGLEFINANCE (B1,"high",TODAY()-6,today())," SELECT Col2 ORDER BY Col1 DESC LIMIT 1 label Col2''")),1,0),IF((GOOGLEFINANCE(B1,"low"))>(QUERY(GOOGLEFINANCE (B1,"low",TODAY()-6,today())," SELECT Col2 ORDER BY Col1 DESC LIMIT 1 label Col2''")),1,0),),"Inside Day","")
THE INSIDE DAY AS A STOCK PRICE INDICATOR
The Inside Day pattern can serve as a valuable tool for traders in various ways. By understanding the pattern and the price action around it, they can better anticipate and capitalize on potential market movements. Here are a couple of ways to incorporate Inside Day patterns into your trading framework:
- Breakout Prediction: The Inside Day pattern often emerges during periods of consolidation when the market is trading within a narrow range. As markets cannot consolidate indefinitely, this pattern may hint at an impending breakout in either direction. By closely examining the price structure leading up to the Inside Day, traders can identify additional clues about the market’s direction and strength, helping them make informed decisions.
- Watchlist Scans: Traders can use watchlist scans to monitor and identify potential Inside Day patterns in real time across multiple stocks. These scans can filter stocks based on criteria such as Daily Range, Range Sipke, and other technical indicators, helping traders focus on the most promising opportunities for potential breakouts.
- Short-term Price Contraction Indicator: The Inside Day pattern can also function as a short-term price contraction indicator. This means that the pattern can signal periods when the market is experiencing reduced volatility or indecision, often preceding a significant price movement. By keeping an eye on this pattern, traders can prepare for potential breakouts or breakdowns and adjust their strategies accordingly.
- Confirmation Tool: The Inside Day pattern can be used in conjunction with other technical indicators, chart patterns, or market analysis techniques to confirm potential trading signals. For example, suppose a trader identifies a bullish trend supported by robust volume and an Inside Day pattern. In that case, this information can be used to bolster their confidence in the trade setup and improve the likelihood of success.
- Market Contraction Indicator: When a significant number of stocks within an index display Inside Day patterns, it may indicate a contraction in the overall market. This widespread occurrence suggests that market participants are indecisive or cautious, leading to a narrowing of the trading ranges across multiple stocks. Tracking such patterns across an index can provide traders with valuable insights into the broader market sentiment and potential upcoming shifts in market trends.
- Market Expansion Indicator: Conversely, a day with few or no Inside Day occurrences among stocks could signal market expansion. In this scenario, the absence of Inside Days implies that market participants are more confident in their positions, leading to increased trading activity and a broader range of price movements. Monitoring the frequency of Inside Day patterns can help traders identify periods of market expansion and potentially capitalize on the increased volatility.
INSIDE DAY BACKTEST
Prior to integrating any specific pattern into a trading system, conducting a backtest is a vital step to gain insight into the behavior of the price in relation to the pattern. By doing so, you can identify recurring features or tendencies that are associated with the pattern. This understanding helps in fine-tuning your trading strategy, as it equips you with an additional layer of analysis that can assist in finding the most promising trade setups.
The following is a backtest for the inside day pattern, in which the last decade’s stock price data is retrieved using the Google Finance function:
=GOOGLEFINANCE("AAPL", "all", TODAY() - 3650, TODAY()).
The backtest is conducted using the following definitions, drawing on Thomas Bulkowski’s work from the book Encyclopedia Of Charts Patterns:
- Occurrences: Count the total number of inside days identified during the backtest period. This will help you understand the frequency of inside days for the given stock.
- Upside: Measure the positive returns on the day following an inside day based on the closing price. This can help you assess how often the stock has exhibited a positive price change after an inside day.
- Downside: Measure the negative returns on the day following an inside day based on the closing price. This will provide insights into how often the stock has experienced a negative price change after an inside day.
- Upside Breakout: Identify instances where the closing price on the day after the inside day was higher than the preceding high. This will give you an idea of the stock’s historical tendency to break out to the upside.
- Downside Breakout: Identify instances where the closing price on the day after the inside day was lower than the preceding low. This will help you determine the stock’s historical tendency to break out to the downside.
- Success Rate: Calculate the proportion of successful breakouts (either upside or downside) on the day after an inside day. This metric will help you gauge the historical effectiveness of using the Inside Day pattern as a trading signal for the specific stock.
By creating definitions and conducting a backtest, you can gain valuable insights into the stock’s historical price behavior. This information can then be used to inform your trading strategy, manage risk, and identify potential opportunities based on the Inside Day pattern. It’s essential to note that the definitions and structure provided here are not intended to be a definitive guide but rather to serve as a reference for asking pertinent questions about market data within the context of your trading framework. Using these concepts as a starting point, you can tailor your analysis to suit your specific trading style and objectives, ensuring that you extract the most valuable insights from the Inside Day pattern.