Technical analysis is clear on what is an outside reversal day and what it means

This was a question in our comment section:

"Can anyone give a brief about outside day reversal. Eurjpy managed to close off from the lows. Will this still be considered outside day? Thanks."

The reader was asking about the daily EUR/JPY chart.

This is a close up ... He is referring to the second last candle (the one I have the arrow pointing at):

The answer is that this is not an outside day reversal, at least not a textbook example.

Here's what I look for for an "outside day reversal"

  • To be of any relevance there must be a prior directional swing, otherwise there is nothing to reverse

The outside reversal candle has to have

  1. A higher high than the previous candle
  2. And a lower low

The outside reversal candle will be more convincing if the close is below the previous candle's close.

Here is a great example of an outside reversal day that we picked out in real-time at Forexlive.

The chart is from a post on October 1, 2014 highlighting an unfolding outside day reversal in USD/JPY.

It said:

"Citi was out with a note earlier comparing a reversal on the first trading day of Q4 to the first trading day of Q1. That move skidded down to the 50% retracement of the recent rally. A similar fall this time would target 105.58."

What was the low two weeks later? 105.23.