The outside day is a simple two-bar pattern that traders must need to know. It is a useful pattern to spot the reversal of the current trend in the market. In fact, this is a very reliable reversal pattern, especially when they form after a very clear uptrend or downtrend.
That said, it is very crucial to learn all about this pattern. Our guide on this pattern is going to help you a great deal in your quest. The guide covers outside day definition and all other key aspects you need to learn. So, let’s start right away.
Outside day definition
The outside day is a two-bar pattern where the second bar has high and low above and below the previous bar. Whereas, the open and close of the second bar also lie outside the open and close of the prior bar. In simple terms, the second bar has a higher high and lower low while open and close-lying outside of the open and close of the first candle. Outside day pattern formation is a very strong signal that a sudden and long-lasting trend reversal is imminent.
Outside day explained
The outside day pattern is the opposite of the inside day pattern. The inside pattern tells traders that the price on the second day remained within the range of the first day. It also indicates that the high of the current period is below the high of the prior period. Moreover, the day’s low also remains higher than the previous bar. This pattern, therefore, indicates that the price remained within the range and didn’t break out of the range determined by the previous bar.
On the other hand, the outside day pattern tells the opposite. Firstly, the high and low of the current bar are outside of the first bar. That indicates that the price broke out of the previous bar’s range in both directions. That said, it is important to note whether both high and low broke out of the first bar’s high and low or not. If not, or any of the conditions aren’t met, the pattern cannot be considered an outside day pattern.
Moreover, this pattern can be bullish or bearish. A bullish outside day pattern is when a bearish red candle is followed by a bullish green candle. The second candle must fulfill the criterion of the outside day candle. A bullish outside day predicts an upcoming bullish trend in the market. Whereas, a bearish outside day pattern is formed when a bullish green candle is followed by a bearish red candle. Again, the second candle must also exhibit all the characteristics of the second candle of an outside day pattern. Similarly, a bearish outside day pattern indicates an imminent bearish trend in the market.
What does the outside day pattern tell traders?
The price action of an inside day pattern is the inverse of an outside day pattern. The former tells traders that price is contracting and volatility is low. Whereas, the latter tells traders that the price is expanding as it breaks out of the previous range on both sides. As you know, the high and low of the second candle go significantly wider. Moreover, an outside day pattern also tells traders that volatility is expanding.
Secondly, traders also try to figure out whether buyers rejected highs or lower rejected lows. Why so? Because this analysis determines the strength of the reversal signal. When the buyers reject high, the price ends near the low and vice versa. On the other hand, if sellers reject lows, the price ends up near the high.
Thirdly, traders also analyze the position of an outside day pattern formation. It also tells traders about the authenticity and strength of the signal. As you know, areas of support and resistance are key areas on price charts. When an outside day pattern forms near these areas is a strong signal. However, it is important to use other indicators for further confirmation.
Fourthly, as we already know, this pattern can be bullish or bearish. However, it may also be a continuation signal. When the outside candle closes near the high during an uptrend, it is a continuation signal. Conversely, when it closes near the low during a downtrend, it is a bearish trend continuation signal.
How to trade it?
There are simple strategies to trade both bullish outside days and bearish outside days. During an uptrend, it is important to observe whether both candles are pointing up or not. If both candles are pointing up, it is a strong continuation signal. If only the second candle points up, it also indicates the continuation of the uptrend. However, if both candles, or only the second candle, are pointing down, it signals a trend reversal.
During a downtrend, it is crucial to see whether both candles are pointing down or not. If both candles are pointing down, it is a strong bearish continuation signal. If only the second candle points down, it also indicates the continuation of the downtrend. However, if both candles, or only the second candle, are pointing up, it signals a trend reversal.
Furthermore, it is the best strategy to wait for confirmation before entering a trade. The third day’s candle gives you confirmation whether the trend will continue or will it reverse. You can enter a long position if the third candle provides you with confirmation. However, if the reversal is indicated by the outside day pattern and the third confirmation candle, you can exit a long position and enter a short position.
Volume is another key factor to determine the strength of this pattern. As you know, higher volume means higher interest and conviction of the traders. So, when an outside day pattern is also accompanied by a larger than average volume, it indicates greater strength. In other words, traders are exhibiting more interest and conviction. However, if the volume is low, you can wait for confirmation or use other techniques to confirm reversal before entering or exiting a trade.