| Outside days can
occur frequently on daily charts. The secret of
the outside day is the bigger the better and it
has more meaning if found at the end of a trend.
They can be short lived and I always take my
profit quickly. The outside day (OD) should
completely encompass the previous day. It must
have a higher high than the previous day and a
lower low than the previous day.
One of the most important things about this
pattern is that the bar closes in the opposite
direction of the trend. If the trend is down the
close on the OD must be near the high or in the
upper part of the bar. The opposite is true of
the up trend. The OD may still work if this is
not the case but my research show that it is
more effective if it does close in the opposite
direction.
A great example of this happened on the cash
Dow as I was trading it (24th July 02, refer to
chart). I like to trade this in two ways. First,
depending on what the market has been doing
prior to the outside day I will place a entry
order a few ticks above the high of the OD if
the trend has been down and I am looking to get
long. Once I am in the market I will place my
stop loss either as a dollar amount or at the
.618 fibonacci retracement of the OD.
If you don't know anything about fibonacci
don't worry, we will cover that in future
lessons. The same applies to the short trade. If
the OD occurred at the end of an up trend and I
am trying to get short, I will place my entry
order a few ticks below the low of the OD. Once
taken short I will place my stop loss order in
the same way as the long trade, either as a
dollar amount or as the .618 fibonacci
retracement.
The second way I like to trade this pattern
is to trade it intraday. I closely monitor what
happens at the high of the OD if I intend to go
long and the low of the OD if I intend to go
short.
Once the high or low has been taken as the
case may be I will then enter the market on a 5
minute or 1 minute chart. For long position I
will buy the first retracement with a tight stop
loss order under an intraday support and if
trying to get short I will sell the first rally
with a stop loss order above an intraday
resistance.
Below are two examples of Outside Days. The
first occurred at the end of a down trend and
the second occurred at the end of an up trend.
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