Inside days are situations in which the price range of a given security is the same on the current trading day as it was on the most recently completed trading day. Considered to be an example of what is known as the harami cross or pattern, an inside day can be an early sign that the trend followed by the security may be about to level off and eventually reverse. Depending on whether that the trend involved is upward or downward, investors who identify the inside day situation can find it helpful in determining whether to buy or sell the security involved, and when to execute that transaction.
One way to understand the impact of the inside day is to consider it as a period where whatever movement previously exhibited by the security comes to a relative standstill. While there is some slight movement within the applied range, that movement has little to no impact on the security price. Reaching this plateau and maintaining it for more than a single trading day can be an indication that the combination of bearish and bullish movements within the marketplace are about to lead the price of the security in a new direction. The goal of the investor is to make the right decision while that security is still in the inside day status, and benefit from that decision once the security moves out of that status.
When the inside day occurs after the security price has been steadily decreasing for some time, this leveling off may indicate that the price has reached the lowest point and is likely to begin a rallying trend after remaining more or less static for a short period of time. In this scenario, the investor may reasonably indicate that the next movement will be bullish, in that the price will move upward once the lull is over. Assuming general market indicators support this potential movement, the investor may choose to buy shares of the security now, hold them through the inside day, and then benefit from their upward movement once the new trend commences.
In like manner, if the inside day occurs after the value of the security has been ascending for an extended period of time, this may be an indication that the upward movement is about to end. Here, the goal is to determine if the inside day is simply a momentary lull before the price continues upward, or if it is a sign that the security price will shortly reverse. Depending on what the investor projects will be the next wave of movement, he or she may choose to see the inside day as indication of an upcoming bearish trend where the price will incrementally decrease. Should this be the case, the investor may choose to sell his or her shares before the downward trend starts, a move that prevents sustaining a loss and allowing the investor to keep all profits earned while the security was following an upward trend.
