Outside Days With An Outside Close

There are numerous chart patterns that can be profitable if they are properly identified and traded consistently. Unfortunately, any one pattern may not appear very often and traders may become impatient waiting for the opportunities. For others who may feel that overall trading success is a combination of small victories, the outside day with an outside close is one such successful pattern.

An outside day has the high and low outside the range of the previous day; that is, the high is higher and the low is lower. An outside close is one in which the closing price is higher or lower than the prior day's high or low, respectively. This is considered an attempt to move in one direction followed by a strong push in the other direction. If the close was in the direction opposite to a recent price move, this is called a key reversal day;11 however, because the previous price direction is not distinguished, it is not necessarily a reversal but may be a renewal of the trend direction.

A brief study by Arnold12 showed that this pattern proved profitable for a small sample of currencies, metals, and financials using the following rules:

1. Buy on the close of an outside day if the close is above the prior high; sell if the close is below the prior low:

2. If buying, place a stop-loss just below the low of the outside day; if selling, place the stop just above the high.

3- Close out the position on the close 3 days after entry.

After studying exits on days 1 through 5 following the trade entry, Arnold concluded that this formation predicts reasonably consistent price movements for the next 3 days.

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