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