As this particular stock traded higher, you would have entered the position at $49.02, because it traded lower earlier in the day. It reversed and went up, hitting your stop loss, at $50.01, on the upside of this position. At $50.01, you would have been stopped out of the position.
At the end of the day, it actually sold off and came back down, under this position. If you realized you had gotten faked out, or stopped out at this position, as an aggressive trader, you would have re-entered your position, at 49.02. You would have hit at least two profit targets here, on the short side.
Sometimes fakeouts do happen. If you entered here, and got stopped out here, you may want to re-enter the position, after you see that this bar had reversed on the day, into the lower 25% range. That would have given you an opportunity to profit from this particular position.
Fakeouts do happen once in a while. They’re not really frequent, but they do happen occasionally. If you do get stopped out on it, that’s just part of the business. You do take a loss every once in a while, on these types of positions. That is the risk.
However, if you do see a reversal bar like this, it’s a fairly low-risk opportunity, to reenter the position at the end of the day, and then capture profits, as that breakout continues to happen, on the downside.
Let’s talk about exit rules and strategies. There are three rules when it comes to exiting the strategy, once you have been filled. Rule one is that the position hits your stop-loss. Remember, that’s part of the business. You lose money occasionally, and you move on to your next trade, as it happened in this particular trade. Rule number two is that you hit one or more of your profit targets, which is the absolute best scenario.
In this case, in American Express, we hit profit target #1, and profit target #2. The third rule is that we count the Inside Day for the trade setup as Day #1, and we exit the position at Day #4, or the close of trading on Day #3, whichever is more comfortable with your style of trading. We close the position whether or not any of the targets have been hit.
In other words, we don’t hang around for the trade to work, as I mentioned. Either it works, or we get out. Conservative players are going to exit the position at Target #1. Slightly more aggressive players may consider selling half of their position at Target #1, another half of the remaining position at Target #2, and another half of the remaining position at Target #3, if it gets hit, or on the fourth day, as we mentioned.
There are occasions and special situations that we need to discuss, to really be comprehensive in this strategy. Number one is if you’re trading this particular Inside Day, and you get a gap down the very next day, below your short entry price, you don’t really need to do anything. Keep your order in, and let the price come back up to your entry price.
A gap down usually indicates strong selling activity. For example, let’s say the price gaps down here. If the price should gap down here, it means that there’s strong selling activity. Selling orders have been building up and entered before the market opens. This usually means there is a higher probability of being profitable in the short trade, if your order is filled. If it gaps down to here, it trades back up to your entry price, at $43.70. You’re short the stock at that position. Generally, it’ll be a much better trade for you if your position is filled. Because of the selling pressure on the stock, the stock will continue, and hit one or more of your profit targets.
If the price does not come back up to your entry price, do not chase the trade. Let it go. There’s always going to be another trade.
On the opposite end, if the stock should gap higher, as it did in this example – the stock did gap higher than your entry price. However, it traded back down into our entry price at $44.58, at which we got filled. This is a scenario where you could have a high probability of profit if it did happen. In this case, we did hit one or more of our profit targets, even though the stock gapped higher the very next day that we were looking to enter into the position.
If the stock gaps higher and does not come back to fill our entry at $44.58, do not chase the trade. Let it go. Like I said, there’s always going to be another trade.
Let’s take a look at some examples of different stocks. Some I’ve traded, and some I haven’t. We can take a look at examples of how exactly to identify an Inside Day, and how we’re going to trade it.
On this particular Inside Day here, as you can see – this is interesting because the range of this particular Inside Day bar was fairly wide. It was over 80% of the previous day’s bar. Normally, I don’t like to trade those. However, it did have a spinning top. It was a fairly narrow body here. Generally, what happens with a narrow body, in candlestick terms, is that there is a potential change of trend.
If you take a look at this particular chart, you can see that there was an up-trend. There was a pull-back here, with a gap below this particular bar here. Sometimes it provides resistance. Sometimes it provides support. Those gaps need to be filled. In any case, I felt it was enough of the downturn of the stock, in fairly high volume, that maybe there was a snap coming back.
I decided to trade this particular inside bar with an entry at $70.54, which was just one penny higher than the inside bar that’s here. It hit profit target #1 almost immediately. On Day 3, we hit profit target #1. We never got to profit target #2, but on day 1, 2, 3, and 4 – we would have exited on the opening of Day 4, which is right here. We’re very close to our profit target #1, on the remaining position.
After that, it sold off quite dramatically. A lot of times – here’s a little bit of nuance, for those who are really interested in trading Inside Days. Sometimes Inside Days, if you extend the highs and lows, sometimes they provide support, and sometimes they provide resistance. A lot of times, stocks will trade around these areas.
For example, as it went up, and it hit our profit target, it started to come back down again, following the trend that was started back here. It actually sold off rather dramatically. Aggressive traders may extend these channels a little bit further, and take positions as they close below these channels, after several days of being out of your initial trade.
Sometimes, though, it’s going to be very profitable trades. Let’s take a look at some other examples. Let’s pick one that we really haven’t picked out yet.
Here’s one in particular that looks like an Inside Day we can take a look at. If you take a look at this chart here, you can see that there’s one Inside Day right here. That looks like a fairly good trading opportunity, and it probably would have been a very good trading opportunity, at the time. All we have to do is set up our channels on the stock, and take a look at our entry, which would be at the high of this particular inside bar, which is $71.10.
We would have entered at $71.11, which we would have gotten filled the very next day, as it did trade down to as low as $71.05. We would have hit our profit target #1 right around here. We would have hit another profit target up in here, and our third profit target probably would have been up here. We probably would have hit all three profit targets on this particular Inside Day.