Narrow Range 4 and Narrow Range 7 help to find the calm so that we can prepare and profit from the impending storm. Market goes through regular contraction and expansion cycle.
“The quiet period before the next explosive market move is like the calm before the storm”
In this trade setup, you should wait patiently for market in order to enter in contraction which means for range of the bars to reduce. Once we spot NR4 or NR7, a bigger price movement and direction is expected. It is a breakout and reversal pattern which helps to generate profit after a range.
In this blog, let us discuss what does Narrow Range 4 and Narrow Range 7 mean and how to trade with them:
| Table of Contents |
|---|
| NR4 and NR7 Trading Strategy |
| How to find NR7 day? |
| How to find NR4 day? |
| NR4 and NR7 Trading Example |
| Key Takeaways |
NR4 and NR7 Trading Strategy
Narrow Range Trading Strategy is a breakout based method that assumes that the price of the security trends up or down after a consolidation in a narrow range.
For NR7 the default period is 7 days which means that if the price range of any particular days is lowest as compared to last 7 days then that day is NR 7 day.Similarly, For NR4 the default period is 4 days which means that if the price range of any particular days is lowest as compared to last 4 days then that day is NR 4 day.
The range is calculated as the difference between High and Low of the particular day.The day after the NR 7 or NR 4 day acts as the confirming day on where the price will move further.If the breakout happens at the high of NR 7 candle then indicates bullishness where as If the breakout happens at the low of NR 4 candle then indicates bearishness.
The philosophy behind this pattern is same as the Bollinger Band Squeeze, a volatility contraction followed by a volatility expansion.
How to find NR7 day?
Following are steps to identify NR7 day:
- Get the high and low data of last few days
- Calculate the range for every day (high-low)
- Compare the range of today and previous 6 days range.
- If today’s range is the smallest of all the 7 days then it is NR 7 day else not.
The NR 7 day can be seen from the chart below:
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How to find NR4 day?
Following are steps to identify NR4 day:
- Get the high and low data of last few days
- Calculate the range for every day (high-low)
- Compare the range of today and previous 3 days range.
- If today’s range is the smallest of all the 4 days then it is NR 4 day else not.
The NR 4 day can be seen from the chart below:
NR4 and NR7 Trading Example
The trading example shows Reliance with 4 signal signs in less than 2 months. We have also used Average True Range indicator which shows the range of the candles. We can see at the NR4 and NR 7 candle the ATR has decreased which means that the range of the candle is the lowest in the last 4 or 7 days.
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A next day move above the high is bullish whereas below the low is bearish. One can notice that NR 4 is formed back to back on three different occasions. The first NR 4 gave bearish signal and we can see that the next day there is gap down opening which confirms the signal.Next NR 4 signal is a bullish reversal signal which is confirmed by the volume and also bullish candle on the next day.
We can see back to back NR 4 candle that generated a bearish candle. One should sell when the price crosses at the low of NR 4 candle or may incur loss if the signal does not work out. At this candle we can also see that ATR has declined.
Finally we can notice NR 7 giving bearish breakout, confirmed by the volume and next day candle.
Narrow Range 4 and Narrow Range 7 give you a chance to be ahead of trade follower/indicator who can jump in the trend after you. One of the easiest ways to trade this setup is to go long above the Day’s high of NR7 or NR4 with a stop of the at the day’s low of the same.
You can go short below the Day’s low of NR7 or NR4 with a stop at the day’s high of NR7 or NR4 day.This pattern gives a trader a distinct edge to trade at least next 2-3 days. In many situations, NR 7 breakout is found near the beginning of new wave.
Key Takeaways
- For NR7 the default period is 7 days, if the price range of any particular days is lowest as compared to last 7 days then that day is NR 7 day.
- For NR4 the default period is 4 days, if the price range of any particular days is lowest as compared to last 4 days then that day is NR 4 day.
- One should buy only when previous candle is NR7 candle, and current candle has a Gap-Up opening.
- One should sell only when previous candle is NR7 candle, and current candle has a Gap-Down opening.
- Preferred timeframe for this setup is daily.
in the chart shown above of reliance industries the NR4/NR7 strategy does not match with “key takeaway” points 3 and 4
Hi Anand,
This is just one of the technical strategies which you can use on the charts.
Thank you for Reading!
Keep Reading!