What is the inside day candle, and how does it work?
The inside day candle is a candlestick chart pattern that forms when a trading session’s price range sits within the previous day’s range.
Learn how to identify and read the inside day candle on a price chart, including ways to interpret breakouts and manage risk, with CFD trading examples.
Key takeaways
- An inside day is a type of candlestick chart pattern that consists of two candles.
- It forms when the second candle has a lower high and a higher low than the first.
- The first candle is called the mother candle and the second is the inside candle.
- The inside candle trades entirely within the mother candle’s range.
- As a result, the pattern shows range contraction.
- A later close outside the mother candle’s range marks an upside or downside break.
- Past performance is not a reliable indicator of future results.
What is an inside day candle?
An inside day candle is a two-session candlestick pattern. It consists of:
- The mother candle: the first, wider session sets the price range for the pattern
- The inside candle: the second session has a higher low and a lower high
It’s called the ‘inside candle’ because the second candle is fully contained within the range of the first.
The inside day shows a contraction in the trading range, because the price didn’t move beyond the previous day’s high or low. However, the pattern doesn’t suggest what the price will do next.
Past performance is not a reliable indicator of future results.
How to identify an inside day candle
To identify an inside day, compare two consecutive daily candles.
Look for:
- A wider first candle – this sets the high and low for the pattern.
- A lower second-candle high – below the first candle’s high.
- A higher second-candle low – above the first candle’s low.
Past performance is not a reliable indicator of future results.
Ways to read an inside day
Once the pattern forms, the mother candle’s high and low become the main reference levels for interpreting what happens next.
| Reading | How it may be read |
|---|---|
| The price closes above the mother candle’s high | Marks an upside break and may suggest stronger upward momentum |
| The price closes below the mother candle’s low | Marks a downside break and may suggest stronger downward momentum |
| The price remains within the mother candle’s range | The pattern remains unresolved |
The preceding trend can add further context:
| Preceding trend | If price breaks higher | If price breaks lower |
|---|---|---|
| Uptrend | May support continuation of the rise | May suggest upward momentum is weakening |
| Downtrend | May suggest downward momentum is weakening | May support continuation of the decline |
A break can add directional context, but it does not show whether the move will continue. Past performance is not a reliable indicator of future results.
Inside day candle CFD examples
The examples below illustrate how the inside day pattern can resolve in either direction. They are hypothetical and do not reflect real events.
USD/JPY forex CFD – upside break
Suppose USD/JPY has been rising on a daily CFD chart.
- Mother candle – the price trades between 101.20 and 105.40.
- Inside day – the next session remains within that range, trading between 102.10 and 104.60.
- Upside break – a later session closes above the 105.40 mother-candle high.
- Illustrative range calculation – the mother candle’s range is 4.20 points. Adding this to 105.40 gives a projected level around 109.60.
Meanwhile, a close below 101.20 would instead mark a downside break.
This is a projection method rather than a forecast. The price could stop before 109.60, move beyond it or reverse.
Past performance is not a reliable indicator of future results.
Brent crude oil CFD – downside break
Now suppose Brent crude oil has been falling.
- Mother candle – the price trades between 101.60 and 107.20.
- Inside day – the next session remains within that range.
- Downside break – a later session closes below the 101.60 mother-candle low.
- Illustrative range calculation – the mother candle’s range is 5.60 points. Subtracting this from 101.60 gives a projected level around 96.
However, a close above 107.20 would instead mark an upside break against the preceding decline.
This is a projection method rather than a forecast. The price could stop before 96, move beyond it or reverse.
These examples do not include spreads, overnight funding or other applicable fees. These costs can reduce profits or increase losses.
Past performance is not a reliable indicator of future results.
What if an inside day breakout reverses?
An inside day breakout doesn’t guarantee that the move will continue – the price can still reverse after breaking above or below the mother candle’s range.
This type of brief breakout and reversal is called a ‘whipsaw’.
For example:
- The price closes above the mother candle’s high, marking an upside break.
- It then moves back inside the range, weakening the reading.
- A later break below the mother candle’s low may point to a move in the opposite direction.
The same sequence can occur in reverse after an initial downside break.
- A move back inside the range can weaken the original breakout reading.
- If the price then breaks through the opposite side, it may point to a change in direction.
Past performance is not a reliable indicator of future results.
Which indicators add context to an inside day?
An inside day can’t indicate direction on its own.
Indicators such as ATR, Bollinger Bands®, Aroon, CCI and OBV can add context around volatility, trend, momentum and volume flow.
Average true range (ATR)
ATR measures how far the price typically moves over a specified period.
- If ATR rises after an inside day, volatility may be expanding.
- If ATR falls or remains low, volatility may stay relatively subdued.
It can show whether range contraction is followed by expanding or subdued volatility.
Bollinger Bands®
Bollinger Bands® show how volatility changes around a moving average.
- If the bands narrow around an inside day, volatility may be contracting.
- If the bands widen afterwards, volatility may be expanding.
They can show whether the inside day forms within a broader period of contraction or expansion.
Aroon indicator
The aroon indicator can provide context about the broader trend.
- If ‘aroon up’ is higher, an upside break may align with the broader trend.
- If ‘aroon down’ is higher, a downside break may align with the broader trend.
It can show whether an inside day break aligns with or moves against the broader trend.
Commodity channel index (CCI)
The CCI measures how far the price has moved from its recent average.
- If CCI rises above +100, this may support stronger upward momentum.
- If CCI falls below −100, this may support stronger downward momentum.
It can provide context about the momentum behind an inside day break.
On-balance volume (OBV)
On-balance volume (OBV) tracks cumulative volume based on whether the price closes higher or lower than the previous session.
- If OBV rises alongside an upside break, volume flow may support the upward reading.
- If OBV falls alongside a downside break, volume flow may support the downward reading.
It can show whether volume flow aligns with the direction of an inside day break.
Discover more chart patterns and indicators with our technical analysis hub.
Risk management and the inside day candle
An inside day can provide reference levels, but it does not determine how much risk a position carries. This depends on factors including range size, position size, leverage and exit levels.
- Range size. A wider mother candle increases the distance between its high and low, while a narrower one reduces it. This can affect potential stop-loss and take-profit distances.
- Stop-loss. A stop-loss level sets where a position closes if the price reaches a selected loss threshold. Its distance from the entry affects the potential loss relative to the position size.
- Take-profit. A take-profit level sets where a position closes if the price reaches a selected target. Its distance from the entry affects the potential reward relative to the risk taken.
- Position size. A larger position increases the effect of the same price move on potential profit or loss.
- Leverage. CFDs are traded on margin, so leverage amplifies both profits and losses relative to the margin committed.
- Reversals. The price can break beyond the mother candle and then move back inside its range, creating the risk of a whipsaw.
You can manage your exposure, but you can’t eliminate trading risks.
*Standard stop-loss orders are not guaranteed. Guaranteed stop-loss orders incur a fee if triggered.
Inside day vs ID/NR4 and NR7
Inside days are related to the narrow-range patterns studied by Toby Crabel. They all describe periods of range contraction.
The main difference is the number of sessions used to define the contraction.
| Pattern | How it forms | What it shows |
|---|---|---|
| Inside day | The session has a lower high and higher low than the previous one | Range contraction relative to the previous session |
| ID/NR4 | An inside day that also has the narrowest range of the latest four sessions | Range contraction across the latest four sessions |
| NR7 | The session has the narrowest range of the latest seven sessions | Range contraction over a longer lookback |
ID/NR4 and NR7 add more context about how narrow the current range is compared with recent sessions. Like an inside day, neither pattern establishes which direction the price will move next.
Past performance is not a reliable indicator of future results.
What research suggests about inside days
Research provides some context on inside days, chart patterns and volatility.
- Volatility clustering – Mandelbrot observed that quiet periods can be followed by further quiet trading. This means range contraction does not necessarily suggest that a breakout is imminent (JSTOR, 1963).
- Chart-pattern research – Lo, Mamaysky and Wang showed that some technical patterns contained ‘incremental information’, meaning their historical return distributions differed in measurable ways (Wiley, 2002).
- Inside-day research – Bulkowski studied 29,641 inside days across 1,260 stocks. In his sample, 62% continued the preceding trend and 38% reversed it. During bull markets, 32% of upside breakouts did not subsequently rise by at least 5%, while 39% of downside breakouts did not subsequently fall by at least 5% (Wiley, 2021).
- Mechanical testing – Bulkowski also tested 29,582 trades using fixed rules. Results differed by breakout direction and market conditions, showing that outcomes were not consistent across the scenarios tested (Wiley, 2021).
Past performance is not a reliable indicator of future results.
