A Narrow Range trading strategy is a breakout-based approach that assumes that a stock's price trends up or down after consolidating in a narrow range.
The idea of trading on narrow ranges comes from Tony Crabel's book, Day Trading with Short Term Price Patterns & Opening Range Breakout. Even though the book was published in the 90s, the narrow range trading strategy, especially the NR4 (Narrow Range 4) and NR7 (Narrow Range 7) are still popular today.
Understanding NR7/NR4
NR7 is the day when the price range was the narrowest in the last seven days. Similarly, NR4 is the day when the price range was the narrowest in the last four days. The range is the price difference between that day's High and Low.
A bullish setup occurs when the breakout is from the top of the NR7/NR4 candle. If the breakout happens at the bottom of the NR7/NR4 candle, it is considered bearish.
How to spot NR7 day:
- Get high and low-price data of stock for the last seven days.
- Calculate the range for every day (range = high - low).
- Compare the range of today to the previous six days' range.
- If today's range is the smallest of the seven days, it is NR7 day; otherwise, not.
How to spot NR4 day:
- Get high and low-price data of stock for the last four days
- Calculate the range for every day (range = high - low)
- Compare the range of today to the previous four days' range.
- If today's range is the smallest of the four days, it is NR4 day; otherwise, not.
How to use NR7/NR4 strategy
Bullish setup: The first step in this strategy is to identify the NR7/NR4 day. While the charting tool does the math for you, the calculation for arriving at these days is given above. If the NR7/NR4 day is the current day, traders can look to initiate a buy position on a move above the high of the narrow range day.
Profits can be booked near the next resistance level or a percentage target can be used. Traders can use the Parabolic SAR (10.4) to set up the trailing stop-loss.
Bearish setup: First, you need to identify the NR7/NR4 day. If the NR7/NR4 day is the current day, traders can look to initiate a short position on a move below the low of the narrow range day.
In this case, the next support level is will be the price target. Alternatively, a percentage target can be used. The next step is to set a trailing stop-loss using the Parabolic SAR.
