1) What is NR7 pattern (Narrow Range 7) ?
Market goes thru regular contraction (i.e. daily trading range getting shorter and shorter) and expansion (i.e. daily trading range getting bigger) cycle. Expanding range is followed by Contraction and vice-versa. So if we can indetify the narrow range days, then it give us a step ahead of everybody to benefit from coming expansion.
NR7 is term given to a day that has the daily range smallest of last 7 days including that day.
NR4 is variation of this where the lookback period is 3 days + current day i.e. 4 days.
E.g. –
Code:
Date High Low Range Remark
27-May-09 4,286.45 4,115.25 171.20
28-May-09 4,354.85 4,254.85 100.00
29-May-09 4,488.05 4,340.75 147.30
1-Jun-09 4,545.40 4,450.40 95.00 NR 4 day. Range smallest of last 7 entries from 28/May till today i.e. 1-Jun )
2-Jun-09 4,586.40 4,453.40 133.00
3-Jun-09 4,574.90 4,478.60 96.30
4-Jun-09 4,582.20 4,453.45 128.75
5-Jun-09 4,636.85 4,561.95 74.90 NR 7 day. Range smallest of last 7 entries from 28/May till today i.e. 5-Jun )
8-Jun-09 4,611.40 4,404.65 206.75 Break of the low of 4561 of NR7 day took it to low of 4365 in next 2 days. Notice the range expansion (206+197 points).
9-Jun-09 4,562.45 4,365.10 197.35
As far as I know, this setup was discussed by Toby Crabel first. Later Linda Raschke has also discussed this in her book “The street smart”. To know more about them you can either refer to these sources or raise questions here and I /other members here will try to clarify it.
Happy Trading.
How to Find NR7 day..
1) Get the High and Low data of last few period
2) Calculate the range of each day i.e. high – low) for each day
3) Compare the range of a today and previous 6 days range (to get NR7. To get NR4 get last 3 days range)
4) If todays range is smallest of all 7 days, then today is NR7 day..else not.
It is that simple.
2) How to trade NR7 pattern ?
This is one of my favourite setup. It gives u a chance to be ahead of trade follower / indicator followers who will jump in the trend after you.
One of the easiest way to trade this setup will be to go long above the Day’s high of NR7 day with stop at the Day’s Low of NR7 day.
Or Go short below the Day’s Low of NR7 day with stop at the Day’s High of NR7 day.
Observing this pattern gives day trader /swing trader a distinct edge to trade next 1 or 2 days. In many cases, NR7 break-out is found near the start of a new wave.
Code:
Date High Low
17-Mar 2805 2744
19-Mar 2822 2771
20-Mar 2,816 2,773
We had NR7 day on 17-Mar-09 /19-Mar/20-Mar If you observe the Day’s low for these dates they u will find that they are not visited since last 3 months.
For day trader, this setup indicates that they can anticipate wide range days, so they should be prepared to chase the trend and use trailing stops so that they can get maximum from
the coming trend.
Option traders, have lot more flexibility to trade this setup without waiting for the break-out to take place.
Happy Trading.
3) How can option trader use NR7 setup ?
Option traders, has lot more flexibility to trade this setup. They can start with direction neutral strategy on the NR7 day when it is under development and then covert it into a directional
strategy after the break-out on next day.
Simple and most familiar strategies that I use
Direction Neutral strategies = long or short straddle / long or short strangle
Directional strategies = Long naked call or put, call or put spreads, Synthetic stock (i.e. sell put and buy call at same strike)
So on NR7 day (one can easily find this by last 15min of the day that we are going to get NR7 day today or not.. and even if it is missed by few points that shd not matter), lets we buy ATM straddle (4500 C+4500 P).
On next day, when mkt breaks-out of NR7 range (say downward break), then we sell the losing Long call leg of straddle. and convert remaining Long Put leg into bearish put strategy by selling lower level put.
say 4400 P). So now our new position is = bearish 4400-4500 put spread. As market falls, this spread will gain in value because the Delta of 4500 Long put is lower then Delta of short 4400 put..giving
us net negative delta . That means as market falls, out bearish position will gain.
(hope I am not confusing you here)
If one is aggressive risk taker, then instead of spread, we could very well live with long put 4500 position after closing the call position.
Each of these alternatives have their advantages/disadvantage so certainly, decision making here is not a binary choice..
Suggested Trading System – DRAFT rules
I am providing the rule for the system here. Please don’t take these rules and start trading. It is given with the intetion that u get idea about how to test this setup and can define your own trading system to backtest. Based on the result, you might have to modify them. The text between < > is for explanation.
Feel free raise your doubts, if any and I or others will try to clarify them. If there is any error / ambiguity then please highlight so that I can correct it (I am human being and do make errors regularly).
Assumptions –
1) After today’s market close, we have the system in place to find out whether today was NR7 day or not (i.e. smallest range of last 7 trading days) You can use the excel sheet attached in post 2 of this thread.
2) We have the time to enter the orders during tomorrow market hours (not busy day at office etc)
3) It is SWING TRADING position i.e. we are looking to hold this position for more then 1 day. We will be using DAILY timeframe chart of NIFTY SPOT to take any trading decision.
4) We are going to use NIFTY FUTURES – NEAR MONTH to trade. On last week of the month, we will start using NEXT Months NF Contract.
5) Do we want to use FILTER of few points above High/Low or not ?
6) Designing the strategy to go SHORT first. This is to maintain simplicity. The rules can be adjusted for LONG entry by applying the same logic with minor adjustments..
Underlying logic behind why this strategy should work –
Refer to post 1 of this thread..
<If you don’t believe in this underlying logic then it doesn’t make any sense for YOU to go ahead with strategy. Even if it is profitable, YOU will find it difficult to implement it because of many psychological challenges posed by your subconscious mind. So either get convinced by underlying logic by asking question, reading, research etc or move onto something else.>
Setup Rules
1) NR7 setup is triggered today.
2) Note the HIGH and LOW of today. (Calling Day0-H and Day0-L)
<these are basic condition that should be met. If they are not in place then skip any other action and do something else>
Entry Rules1) SELL below the Day0-L on next day i.e. Day1. (BUY above the Day0-H)
<These rules should be clear enough for even a 10yr old person with basic knowledge of chart construction, to understand else there is chance of improvement>
Exit – Stoploss
1) For Short trades, stoploss is at the Day0-H. (For long trades, stoploss is at the Day0-L).
<if using multiple contracts, then write in details how much of position will u liquidate and at what point>
Exit – Profit taking
1) No plan to place profit taking order for the time being. Trailing stoploss orders will be used to exit the position.
<you can define your rules for profit taking if you want. I generally touch this section after backtesting/some experience with the system>
<if using multiple contracts, then write in details how much of position will u liquidate and at what point>
Exit –Trailing Stoploss
1) For Short trade, trail with the stop at HIGH of Previous 2 bars. (i.e. On Day1, stop = Day0-H/ Day2 , stop = Day0-H/ Day3, stop = Day1-H / Day4, stop = Day2-H and so on)
2) If market gaps from trailing stop order level /or for some reason the trailing stoploss order is not executed, then close the position immediately at whatever price is available.
3) Stoploss moves only in the direction of the trade. They are never moved against the direction of our position.
<if using multiple contracts, then adjust this section accordingly>
Following two sections needs to be customised for individuals account size and risk tolerance limit. But the example below will guide u in answering them.
I will certainly like to come back and update these sections as they are the foundation of trader’s long term survival and the success.
Position size
<this deal with the question – how much quantity? Best practice is not to put more then 5% of your acct capital on one single trade.>
1) Trade size – 1 NIFTY contract
2) No add-on is considered at this stage. <else write down how will u add-on to the position>
Money Management
1) Initial risk of < 150 NIFTY points
2) Once in a trade, not to leave more then 200 points on the table.
<This might result in overriding your trailing stoploss section but it is important for you to be comfortable with your open profit and not fear about loosing the profit
Best practice – not to Risk (difference between entry point and stoploss) more then 2% of your acct capital on one single trade. If the risk in more then this then either skip the trade or accept the fact that you are taking higher risk and ready to face psychological roller-coaster ride when trade is open>
Following two section are not specific to this strategy but they are basic for successful trading
Mental /Psychological setup 1) Clarity in the underlying concept of this strategy. Know your strategy as much as possible.)
2) Not to confuse your mind with other exit rules.. that are not being backtested.
3) Focus on EXECUTING the trade RIGHT, not on result. YOU can only control your EXECUTION, it is upto market (which is beyond your control) to give u profit or loss.
When not to trade this strategy –
1) When u are not comfortable with the market conditions
<this section is one of the most important section for professional traders. They know the environment when this strategy will not work or produce poor result. You may not know at the beginning but as you backtest or start using this strategy, you will learn it gradually and can fill this section later.>
Useful Resources
1) Following post has an Excel file to track NR7 day (user needs to enter or copy OHLC data in first few columns and NR7 bars will be flagged in seperate column.
http://www.traderji.com/advanced-tra…tml#post323581
2) Link to the post that has AFL created by asnavale to mark NR7 on amibroker charts.
This can be used for drawing indicator on the chart, and can also used for exploration. More details are in the post.
http://www.traderji.com/advanced-tra…tml#post371137
3) Link to the post that has input from by SwamiNathan for Metastock user .
This has code for MS indicator..as well as for system tester to backtest the system
http://www.traderji.com/advanced-tra…tml#post361639
4) Link to post that has an excel sheet to log backtesting trades. Once u enter trade details, it will calcualate and generate basic statistics for your rules and will help you understanding the strategy well..
http://www.traderji.com/advanced-tra…tml#post324153
5) Some rules to identify false v/s succcessful breakout
http://www.traderji.com/advanced-tra…tml#post384035
6) Approach to test NR7 breakout on intraday basis. Use this in conjunction with rules given in point (5) above.
http://www.traderji.com/advanced-tra…tml#post421908
6) Excellent post by Raunak on how to analyse market and set stopshttp://www.traderji.com/technical-an…tml#post492396
If you come across any useful resource that can be included here then please make a post in the thread.
Rules:
1. Identify an Inside Day/NR4/NR7
2. The next day, buy if market moves above previous day’s high or sell if it moves below the previous day’s low.
3. Put stoploss as previous day’s low if buy triggered, or previous day’s high if sell triggered.
4. If stoploss is triggered, immediately reverse position.
5. Trail a stop to lock in accrued profits.
6. If the position is not profitable within two days and you have not been stopped out, exit the trade. Usually, when the setup works, it is profitable immediately.
————————————————————————————
The reason to trade this strategy is that losses are small, and occasionally, a big winner will fall into your lap.
It is important for traders to realize the importance of stopping and reversing on a same-day whipsaw.
Usually, the best trades occur after one group of market participants has been trapped. They’ll later become fuel for the fire when their losses deepen.
Keep dropping your pole in the water and once in a while you will catch a big one 
First create an indicator as below
NR7 {the name shud be only this}
RANGE:=H-L;
NR7:=If(RANGE<Ref(RANGE,-1) AND RANGE<Ref(RANGE,-2) AND RANGE<Ref(RANGE,-3) AND RANGE<Ref(RANGE,-4) AND RANGE<Ref(RANGE,-5) AND RANGE<Ref(RANGE,-6),1,0);
NR7
{Then create a metastock system tester – u can give ur own name}
Buy Order:
REF(Fml( “NR7”),-1) =1 and h>(0.05+ref(h,-1)) and REF(l,-1)> REF(Mov(c,5,s),-1)
{For profit stop we are using a trailing 5 period MA. Therfore We have included and REF(l,-1)> REF(Mov(c,5,s),-1) in order to avoid controvacies. i.e. we are not entering long is the low of the NR7 is lesser than 5 period MA. If anybody have better suggestion u can give}
Order type
STOP LIMIT
{We are doing all trades in stop loss basis only, If NR7 method gives a buy and yest high is 357.50, then we are giving a stop loss buying at 357.55, i.e. 0.05 paisa plus yest high}
Stop Price
0.05+REF(H,-1)
Expiration
Good gor Day
___________
Sell order
IF(REF( Fml( “NR7”) ,-1)=1,l<(REF(L,-1)-0.05),l<REF(mov(c,5,s),-1))
{If yest is NR7 then we have bought today, our s/l is yest’s low less 5 paise. In other cas, If we have entered yesterday or older then if the prices cuts 5 day MA(of yest) then we are closing by S/l. This will work as a trailing stop loss and also a profit stop. We will put stop loss in the mkt opening itself with trigger is yest’s 5 day MA if we have entered yest or older. If we have entered today, i.e. if yest is NR7, We will put a stop loss at yest’s low less 5 paisa.}
Order type Stop Limit
Stop Price: IF(REF( Fml( “NR7”),-1)=1,(REF(L,-1)-0.05) , REF(Mov(c ,5 ,s ),-1) )
Expiration
Good gor Day
__________________
Sell Short Order
REF(Fml( “NR7”),-1) =1 and L<(-0.05+ref(l,-1)) and REF(h,-1)< REF(Mov(c,5,s),-1)
Order type Stop Limit
Stop Price:
-0.05+REF(l,-1)
Expiration
Good gor Day
__________
Buy to Cover Order
IF(REF( Fml( “NR7”) ,-1)=1,h>(REF(h,-1)+0.05),h>REF(mov(c,5,s),-1))
Order type: Stop Limit
Limt Price:
IF(REF( Fml( “NR7”),-1)=1,(REF(L,-1)-0.05) , REf(Mov(c ,5 ,s ),-1) )
Expiration
Good for Day
_____________________
All formulas are done in metastock 10.1 VErsion, but will work for older ver also. All codes are done with simplicity so that MEtastock 6.1 will even accept the codes. For ex, in NR7 indicator can be dome by LLV function. But it is not available in 6.1. You do all testing in your own metastock. All Price data are available freely. If u have any queries you are welcome.
. The total points accumulated were ~1000 
, that too with only 1 lot!!!.
indiansharetraders 