Narrow Range trading strategy or NR7 Trading strategy is a breakout based intraday strategy which assumes that the price of a security trends up or down after a brief consolidation in a narrow range i. Narrow range patterns come from’s book, “Day Trading with Short Term Price Patterns & Opening Range Breakout”.
Even though the book, which was published in 1990, is currently out of print, many of its ideas are still effective. In particular, the NR4 (Narrow Range 4) and NR7 (Narrow Range 7) patterns are quite popular with short-term traders.
The profit really comes from the strategy that you are most comfortable to trade with. The philosophy behind the pattern is similar to the Bollinger Band Squeeze: a volatility contraction is often followed by a volatility expansion.
Intraday Strategy – NR7
Market goes through regular contraction (i.e. daily trading range getting shorter and shorter) and expansion (i.e. daily trading range getting bigger) cycle. Expanding range is followed by Contraction and vice-versa. So if we can indetify the narrow range days, then it give us a step ahead of everybody to benefit from coming expansion.
NR7 is term given to a day that has the daily range smallest of last 7 days including that day.
How to Find NR7 day
1) Get the High and Low data of last few period
2) Calculate the range of each day i.e. high – low) for each day
3) Compare the range of a today and previous 6 days range (to get NR7. To get NR4 get last 3 days range)
4) If today’s range is smallest of all 7 days, then today is NR7 day..else not.
It is that simple.
This is one of my favorite setup. It gives u a chance to be ahead of trade follower / indicator followers who will jump in the trend after you.
One of the easiest way to trade this intraday strategy setup will be to go long above the Day’s high ofNR7 day with stop at the Day’s Low of NR7 day. Or Go short below the Day’s Low of NR7 day with stop at the Day’s High of NR7 day.
Observing this pattern gives day trader /swing trader a distinct edge to trade next 1 or 2 days. In many cases, NR7 break-out is found near the start of a new wave. For day trader, this setup indicates that they can anticipate wide range days, so they should be prepared to chase the trend and use trailing stops so that they can get maximum from the coming trend.
On 02/09/2014, Auropharma had the lowest range day in last 7 days. i.e NR7 day. on 2nd, the high price was 818.3 and low price was 805.25
On next day, if the stock hits the high of 818.3, we will go long with stop loss of that day’s low which is 805.25.
You can see that stock was moved out of contraction phase and started trending from 800 to 900 within few days.
On 24/6/14, Tech Mahindra had the NR7 day with high of 2007 and low of 1987.15, next day if the stock hits 2007 we go long with 1987.5 as stop loss. The stock zoomed in next 3 days to Rs. 2135
This intraday strategy works well with many stocks.