The term “NR” in “NR4” or “NR7” means “Narrow Range”. Narrow Range Strategies are basically Price action strategies (i.e. it relies on the only price of the stock and doesn’t take account of other things like – indicators, volume, sun and moon’s location, etc.)
Here, Range means the difference between the high and low of the security in the absolute figure. We are not concerned about where the security opened or closed. We are concerned about the range.
Narrow Range Patterns was first coined in the book Day Trading With Short Term Price Patterns And Opening Range Breakout by Toby Crabel. The book showcases an in-depth analysis of many theories and their subsequent patterns based on just Open, High, Low, Close of a said security and their statistical outcomes.
The Theory of Contraction and Expansion:
The market goes through contractions (i.e. daily trading range getting shorter and shorter) and expansions (i.e. daily trading range getting bigger) cycle. The author argues that after contraction, the probability of “breakouts” or expansions, occurring is higher.
The philosophy behind the pattern is similar to the Bollinger Band Squeeze: a volatility contraction is often followed by volatility expansion. In this case, Volatility is being quantified by “Range” of the prices.
NR7 is the term given to a day that has the daily range smallest of last 7 days including that day. Although NR Strategies started using prices of Daily Timeframe, The core theory is valid for all timeframes with more increasing uncertainty in smaller timeframes.
So, Instead of referring to “day”, We will refer as “bar”.
Similarly, In, NR4 Strategy, we try to identify stocks where the range is narrowing and the current bar’s range is the lowest amongst 4 bars ( i.e. 3 bars excluding the current bar).
So, by definition –
- All NR7 bars are automatically NR4 bars.
- NR4 bars have more chance of expansion than NR4 bars based on our theory.
Refining NR7 Strategy with Inside Bar Theory:
NR7 is a way of creating a watchlist. There are many widely popular strategies that deal with stocks from the NR7 watchlist (How/When/What to enter/exit).
One of the most popular methods is to refine the watchlist with inside bars. The NR7 stocks will be checked if their last bar is an inside bar!
The inside bar strategy is a price action strategy and is also based on the same theory of expansion and contraction but here the expansion and contractions are defined based on different rules.
So, the probability of winning automatically improves.
Here is the final scanner –
Here goes the output –
Intraday NR7 Strategy based on Weekend Theory:
The primary trading idea of NR7 Setup here is –
- Long if the high of the previous day’s high is broken with stop loss at the previous day’s low.
- Short if the low of the previous day’s low is broken with stop loss at the previous day’s high.
#1 Manappuram Finance –
Yesterday, It had the Narrowest Range day in the last 7 days i.e. NR7 day and it was having an inside bar. It trigged buy at the beginning of the day and ran with good momentum.
#2 Axis Bank –
The day before yesterday, Axis bank was having NR7 and Inside Bar day and it triggered sell. That ended in profit.
But, Yesterday, Axis bank had NR8 day because the range created on the NR7 day ended up narrower. But, ironically, this time, it triggered buy. That ended in massive profits.
Intraday NR7 Strategy based on Gap Theory:
In this case,
- Long if there is a gap up with stop loss at the previous day’s low.
- Short if there is a gap down with stop loss at the previous day’s high.
But, let’s stick to the first said method only.
You can find more examples in this article – How do you find out the breakout direction of NR7?