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Trading Concept: Inside Trading Days

By Sean Hyman | April 21, 2009

One concept that short term traders look for are “inside days”. What is this? It’s where a completed candle’s high/low of the day is within the range of the previous day’s high/low. See the chart below and I think you will see what I mean. Notice that the current closed candle is within the boundaries of the previous day’s high/low (blue lines).

When there are one or two “inside days” from a previous candle, it means that the volatility is compressing (or coiling up). When this happens, there is a huge chance of a sizable breakout to one side or the other.

The strategy is to put an order on either side of the breakout with a reasonable limit (15-20 pips). When one of the order triggers, cancel the order that would be in the opposite direction to ensure that it doesn’t get hit too.

Yesterday, I noticed that there were two “inside days” on the daily charts. Remember, you have to wait until the candle closes at 5pm EST before you can say it’s closed. EUR/CHF and AUD/NZD were the two pairs. Since AUD/NZD has a much smaller spread to overcome, I’d favor the EUR/CHF pair.

Place an entry order on either side of the pairs previous day high/low by 1 to 2 pips. Also, include a limit order at that time too and a stop. The limit would need to be 10-20 pips (something near term). That way, any real spike could trigger your limit. You’d want a wider stop (you decide…but something wide enough to handle the volatility…maybe 50-60 pips). The thought being that there should be much more of a likelihood of the limit hitting than the stop, therefore making the wider stop worth its distance.

Keep in mind to practice these on a demo account first.

Sean Hyman

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