Do any of you pay attention to inside days and have strategies to play them?
I havent take a look at them closely but I was putting some thought into it and decided to take a look. Perhaps we can add our insights to develop a strategy that we can trade off independently. (each trader should have a method that fits them)
To me playing inside days reminds me of Raul's morning breeze strategy. Basically entering in the direction of the breakout from the previous days high or low. What I have noticed is that anytime price breaks out of the previous days range (assuming the previous day was an inside day) the markets tend to go in that direction for a good amount of points. (dont ask me what good amount is.. I have not backtested any of this)
I want to look at some examples of the most recent inside days. Feb. 28 and March 2nd was an inside day.
The strategy I have in mind is identical to the Morning Breeze. Play the breakout of the range. The chart below shows the break of the low from the 28th. Price declines for approximately 100pts before reversing.
Now lets take a look at March 5th, the day after the inside day on March 2nd. The first arrow shows a fakeout when breaking the low. Would the trade been a loss? Im not sure.. since price did decline for 24pts before reversing. Depending on whether you scale out or move stop.. this trade may have been break even or even profitable. The second arrow shows a valid breakout causing price to decline 60pts.
Now I had to go back to January 23rd to find another inside day. Let's take a look.
Below is a chart for January 24th, the day after the inside day. The first arrow points to the opening drive up. We have a pullback that violates the previous days high by about 12 ticks then reverses for a nice trend day.
Lets take a look at one final example of an inside day on December 26, 2006.
The chart below shows price action from Dec. 27th, 2006, day after the inside day. Price gaps up and never looks back. How interesting.
The following study is based on a small sample size. But I find this extremely interesting. Perhaps it is worth taking a look and devise strategies or be aware of inside days. Inside days do not occur often but when they do perhaps traders can take advantage of this.
All thoughts and insights are welcome.