Narrow Range # of Days Bar Chart Pattern
The "NR" stands for "Narrow Range". The "4" means the last bar of the past 4 bars has a narrower range than all of the previous three price bar ranges. Range is the difference between the bar's high price and low price. Similarly, the "7" means the last bar of the past 7 bars has a narrower range than all of the previous six price bar ranges.
NR4 Breakout Upward
The buy signal for a NR4 pattern is when price on the 5th day exceeds the high of the narrow ranged 4th day; a stop loss is placed at the price of the low of the narrow ranged 4th day and typically the trade is exited at the close of the same day the buy order was placed (Kirkpatrick & Dahlquist, 2010, p. 386).
NR4 Breakout Downward
The sell signal for a NR4 pattern is when price on the 5th day falls below the low of the narrow ranged 4th day; a stop loss is placed at the price of the high of the narrow ranged 4th day and typically the trade is exited at the close of the same day the sell order was placed (Kirkpatrick & Dahlquist, 2010, p. 386).
NR7 Bar Chart Pattern
The NR7 pattern has the same trading methodology except for the buy or sell order is on the 8th day and is based on the high and low price of the 7th day that is the narrowest range of the previous 6 days.
NR4 (Narrow Range 4) Chart Example
The chart daily chart of the S&P 500 ETF shows three NR4 patterns. The first pattern comes after a large price bar move higher; prices then consolidate with the fourth day being a very small bar pattern. Price opens after the fourth day's narrow range and then moves higher penetrating the high price of day 4, and triggering a buy signal. The low price of day 5 did not fall below the low of the narrow range day 4, so the buy trade was not stopped out for a loss. Using the typical sell at close rule, the trade would have been exited profitably.
The next NR4 pattern occurs after a downtrend where the fourth day is a small ranged consolidation bar. Again, price opens within the range of the fourth day and then moves toward the high of the fourth day narrow ranged bar, signaling yet another buy. Prices close the day higher with a profit because prices did not fall below the low of the fourth day narrow ranged bar which would have triggered a stop loss.
Intraday-Chart to Determine Breakout Direction
The last example in this chart is a many times failed NR4. In order to determine which happened first, the breakout above the fourth day's high or the breakout below the fourth day's low, the intraday chart is used. The 15 minute intraday chart shows that a breakout below the prior day's low triggered a sell signal; however, price moved higher to the prior day's small ranged high and a trader would have been stopped out. Oftentimes, traders will not only get stopped out but they will reverse and buy to go long. This too, would have been disastrous because prices didn't go higher after being stopped out.
NR7 (Narrow Range 7) Chart Example
Again, the daily chart of the S&P 500 (SPY) shows two NR7 patterns. The 7th day of the past seven days has the smallest range. The following 8th day breaks out above the previous day's high and closes for a profitable trade. The next NR7 pattern does the same thing and breaks out above the previous day's small ranged high and closes higher for a profitable trade.
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