Sunday, August 02, 2009

NR7

What is NR7 and what is its significance in trading?

NR7 is the the narrowest bar in the last seven bars. The significance of which is price/volume contraction ahead of expansion. Alan Farley refers to NR7 as a coiled spring. Therefore, if we look to track NR7, we presumably, can find setups that will provide solid entry points and quick results on the plus side of the P&L.

Actionable NR7 setups usually occur in the congestion zone following a decisive move in one direction or the other. Volatility contracts as many participants move to the sidelines awaiting a signal of continuation or reversal of the existing trend.

What timeframe to use for spotting NR7?

NR7 can be traded on any timeframe, but the longer the timeframe, the more meaningful the setup. So using a 15 minute chart for daytrading NR7 would likely have more meaningful results than a 1 or 3 minute timeframe. I currently monitor NR7 bars on the Trade Ideas Scanner which runs on the 15 minute timeframe. The scan was developed by Trader Mike for TI, and the archives Mike's blog are a great resource for NR7 trading tips.

So, once NR7 scans spit out a list of candidates, what do we look for as far as actionable trade setups?

It's easier to define your criteria beforehand, rather than using a process of elimination. As we stated earlier, actionable candidates have already made a decisive move and are consolidating that move. So if I'm scanning my usual suspects watchlist, I want to focus on sectors/stocks that are in or near the top or bottom of their recent trading range, or stocks that have already broken out and are forming a base such as a handle or flag through price/volume contraction.

How do the key moving averages come into play?

In reference to the 15 minute timeframe -
  • avoid trading NR7 if the 50 SMA is flat and close to price. Why? By my definition, the 50 SMA defines the broader trend and a flat 50 SMA means the stock has no trend. The closer it is to price, the more likely the stock has little or no pulse. Therefore, in this case, it's better to wait for price to make a move before jumping in;
  • in the a.m. (EST) look for proximity to the rising/declining 5 period EMA;
  • in the p.m. look for proximity to the 20 EMA if you spot am ambush-like setup.

How do we define the bar count to determine a real NR7?

The TI scanner has a continuous count from one day to the next. If a stock had a series of NRBs at the end of the previous day, we likely won't print NR7 on the scan until the 7th bar. How practical is this? It may not be practical for gappers, so we have a second, work around, strategy for gappers - NRIBs (narrow range inside bars), again in very close proximity to the sloping 5 period EMA. The sweetest setup of all is the NRIB (NR7).

Let's look at some examples of NR7

GXDX, from the TI pre-market gap scan, printed NRIB NR7. The way I trade these is to place a buy stop order above the outside bar. Once the trade executes, I place a stop pennies below the outside bar. GXDX is an example of NR7 in the context of a gap trade. I didn't trade it.

GG was a NR7 from the TI scanner on Friday. AEM, NEM and GG all printed NR7 at the same time. AEM had already filled it's gap, so I entered long GG and NEM.

RIMM is a trade from June 19th following a disappointing earnings report. The NRIB sets up at the base (handle) of an inverse C&H pattern.

All of these setups meet the primary criteria:

  • consolidating after a decisive move;
  • close proximity to sloping 5 period EMA;
  • NR7 price and volume contraction;
  • easily identifiable base or chart pattern.
On days where the markets gap and run, the NRIBs usually setup within the first hour, so keep that in mind as well. Running the TI NR7 scan on the entire universe of stocks (even with filters) is a waste of time because many of the candidates will be anemic, flat liners. Best to use the TI NR7 scan in the context of a WL and/or as an add on to pre-existing scan either gaps or breakouts. As an add on, the first criteria is already met before it prints NR7. The WL is usually small and manageable, and presumably you've done the homework and already have a focus list.

Related posts: NRIBs Revisited

N.B. - TI scanner does not currently have a scan for NRIBs, this part is done purely through eye balling.

12 comments:

Day Tradr said...

Excellent post Jamie. Thanks!

anarco said...

Hi Jamie~
Thank you very much for a such a great post.
I have a question regarding the GXDX setup. For this setup do you take into account that the ORH could act as resistance?
Thanks again.

Jamie said...

Thanks Day Tradr

Jamie said...

Thanks Anarco,

Yes, always check the pre-market high, ORH and daily before committing money to the trade. We noted that the pre-market price action acted as resistance on our EBAY gapper trade on July 23rd. In the case of GXDX, pre-market high was in line with the base at blue line, so we can assume a BO will at least reach next whole $ level which is very close to ORH. The daily chart tells us that price formed a tower topping pattern and reversed at $32.00, so that would be a likely secondary target.

Using the traditional Trader-X model of break of ORH is another option for trading this type of setup as long as the ORH isn't too far from the base.

Jim said...

A very well done post Jamie.

Jamie said...

Thanks Jim,

I think it represents our collective ideas and conclusions on NR7 and NRIBs as discussed over the years.

Jim said...

Jamie,

Yes, very representative. Did TI create an IB scan while I was not looking? ... or do you still detect NRIBs manually?

Jamie said...

Jim,

No such luck. I will modify the post to make a note of that.

x said...

Great post Jamie!

In your TI scan, do you also add criteria other than NR7?

Jamie said...

Thanks x,

Yes, I have several scans with different criteria. I also combine the NR7 with pre-market gappers. In order to minimize the number of hits I use a volatility factor.

Pat said...

NR7 was originally proposed by Toby Crabel. The backtest is here: http://www.oxfordstrat.com/trading-strategies/pattern-nr7/
Crabel used the opening range breakout (ORB) entry, but this method deteriorated.

Erzberger said...
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