Let me zoom ahead here, on the same chart, American Express, to June 12. I’ll show you a particular Inside Day that I would not trade. Here, we have a large red bar, which indicates that bears were in charge of this day. The American Express stock sold off pretty dramatically on this particular day.
The very next day, you have a bar, in which there was a lower high, and a higher low, than this particular bar. That would fit the definition of an Inside Day. The only problem with this particular bar is that it’s almost the same range as the bar that precedes it.
When we’re looking at identifying Inside Days, yes, it does fit the definition. I would not trade this particular Inside Day. I would like to have an Inside Day that’s approximately 50% or less, of the bar that precedes it. That’s just my personal choice.
We have traded 60%, or even 70% of the previous bar’s range, using Inside Days, with success. Generally, if you would like to keep your risk as low as possible, you would like to have a smaller Inside Day bar, or narrow-range bar, in comparison to the one you’re measuring it against – the previous day’s bar.
Once you’ve identified an Inside bar that you would like to take advantage of, the only thing that you really need to do is to go to your Drawing tools. Most brokers’ software platforms include a number of different technical analysis tools. Many of those also include channel tools. In the platform that we’re using, this is the Think or Swim platform. We’re using the platform charts.
All we’re doing is going into our Drawing Tools, and then coming down to our channel. We click on that, and come over to the place where we would like to start the channel – we would like to start the channel right at the high of this particular bar. We right-click on that, and then we draw out the beginning of the channel, on the top of the bar.
Then, we right-click again. We drag this down to the lower end of the bar. That sets up our channels. In this particular case, I have a higher-end channel. I have a lower-end channel, at the bottom of the particular bar. I also have these 25% channels, inside of those bars.
I will explain to you, for aggressive traders, when we get into our entrance criteria, exactly how we use those.
That’s how you begin. You begin by drawing the channel against this particular bar, our Inside Day. This gives us the beginning of our setup.
It’s important to understand why this particular trade works. The goals of bulls and bears are always to push prices higher – if you’re a bull, of course – or lower, if you’re a bear, than the previous day’s high or low. When that doesn’t happen, their power struggle ends in frustration.
Inside Days happen when there’s really a fight between the bulls and the bears. In fact, the strength of the bears and the bulls are about equal, and neither side gains any ground in pushing the stock higher or lower. That’s why it ends up as a day that has less of a range of movement than the prior day.
Neither side can push the price in the direction they wanted. It creates just a little movement in either direction. That creates short-term frustration. Usually, the power struggle lasts no more than a day. It’s extremely rare to have a narrow inside bar, followed by another narrow inside bar. In fact, the odds are extremely low that you would have an Inside Day, followed by another Inside Day.
If you ever see one, you might want to add to your position. The price move could be really outstanding.
Trading Inside Days is like trading a shaken-up bottle of soda pop, or whatever you like to call sweet carbonated drinks in a bottle. When you shake the bottle, you twist off the cap, and it explodes. Those who wanted to push the prices higher or lower will try again the next day. Usually, one side will overpower the other, and win.
It’s like a tug of rope. One side is going to dominate. For example, if the bulls outnumber the bears, in the following day, prices are going to go higher. Conversely, if the bears outnumber the bulls, on the following day, prices will go lower. That’s how we profit. We simply take the side of the group that has the most power to push prices in their direction.
Specific criteria are going to help you stay out of trouble and minimize your losses. Let’s get into the entrance criteria for trading Inside Days.
The entrance criteria could not be easier. However, I don’t recommend placing this trade just prior to an earnings announcement. You’re only going to be in the trade for a few days – four, at most. You can plan accordingly. If you know that earnings are coming up, I would stay out of the trade, because of the potential for the stock to either gap much higher or much lower than your entry prices.
Our entry criteria for this position is – basically, what we do is take a penny above the high of the NIB, to enter our long position. We take one penny below the low of the NIB to enter the short position. Let’s take a look at exactly where those positions are.