Analysing a Wedge Within a Wedge
Title bar: NR7: Harness the Power of Price Compression
Content:
Imagine having a tool in your trading arsenal that can help to predict expansive directional price movement with remarkable accuracy. The NR7 pattern, though often overlooked, offers this very capability. Let's delve into the power of NR7 and how it can applied to real-world trading scenarios.
What is NR7?
NR7 stands for “Narrowest Range 7.” It identifies a session where the trading range (the difference between the highest and lowest prices) is the narrowest compared to the previous seven sessions. This term was introduced by Toby Crabel in his classic book, Day Trading With Short-term Price Patterns and Opening-range Breakout. Crabel's work emphasised statistical relationships between the size of the prior days range and effective conditions for short-term trading, making NR7 a crucial pattern for price action traders.
NR7 Pattern: Daily Candle Chart
Past performance is not a reliable indicator of future results
Why is NR7 So effective?
The NR7 pattern leverages the cyclical nature of price compression and expansion. Markets often go through periods of low volatility (price compression) followed by high volatility (price expansion). Recognising these cycles can provide traders with significant advantages. Here's why this is important for trading:
Predicting Trend Days: An NR7 condition sets the market up for potential trend days. Following an NR7 day, there is a higher probability that the next session will have a larger than normal range and more directional intraday action. This helps traders anticipate significant moves.
Timing Entries: By identifying periods of price compression, traders can time their entries more effectively. Entering trades as the market transitions from low volatility to high volatility can create trade setups that have attractive levels of risk-to-reward.
The Potential for Multi-Day Expansion
An NR7 pattern doesn't just signal potential moves for the following day; it can also precede multi-day expansions. When a market breaks out of a narrow range, the subsequent move can extend over several days. This provides opportunities not only for intraday traders but also for swing traders looking to capitalize on extended trends.
NR7 Pattern’s Leading to Multi-Day Expansion: Daily Candle Chart
Past performance is not a reliable indicator of future results
Combining NR7 with Other Indicators
While effective on its own, the NR7 pattern becomes even more effective when combined with other technical indicators. Here are a few ways to enhance its use:
Support and Resistance Levels: Identifying key support and resistance levels can help set realistic targets and stop-loss levels. A breakout from an NR7 pattern that also clears a significant resistance level can indicate a strong move.
Keltner Channels: Keltner Channels wrap 2.5 ATR’s (average true ranges) around a 20 period exponential moving average (basis). NR7 day’s that form near the basis of the Keltner Channel can often lead to a break into the upper or lower channel.
Compression Patterns: NR7 day’s can often be part of multi-day compression patterns such as bull flags, ascending triangles, and wedge patterns. Always view the NR7 day within the context of the bigger picture pattern.
Momentum Indicators: Indicators like the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) can help gauge the strength and sustainability of the breakout. If these indicators are in alignment with the breakout direction, it adds another layer of confirmation.
Example: FTSE 100
Before: FTSE 100 Daily Candle Chart
The FTSE 100 forms two consecutive NR7 daily candles beneath a well-defined area of resistance. Collectively the candles are part of a small ‘bull flag’ pattern which is forming near the basis of the Keltner Channel, and the RSI indicator is holding above 50.
Past performance is not a reliable indicator of future results
After: FTSE 100 Daily Candle Chart
In the days that followed, the FTSE 100 index moved higher – breaking out of the NR7 ranges, the bull flag, and above resistance. The breakout saw the RSI indicator surge above 70 and prices push into the upper Keltner Channel.
Past performance is not a reliable indicator of future results
Conclusion
The NR7 pattern is an effective yet simple tool that has the potential to enhance your trading strategy. By recognising periods of price compression and anticipating subsequent expansions, traders can position themselves for potential trend days and multi-day moves. Combining NR7 with other technical indicators can provide additional confirmation and improve the accuracy of your trades.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80.84% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Content:
Imagine having a tool in your trading arsenal that can help to predict expansive directional price movement with remarkable accuracy. The NR7 pattern, though often overlooked, offers this very capability. Let's delve into the power of NR7 and how it can applied to real-world trading scenarios.
What is NR7?
NR7 stands for “Narrowest Range 7.” It identifies a session where the trading range (the difference between the highest and lowest prices) is the narrowest compared to the previous seven sessions. This term was introduced by Toby Crabel in his classic book, Day Trading With Short-term Price Patterns and Opening-range Breakout. Crabel's work emphasised statistical relationships between the size of the prior days range and effective conditions for short-term trading, making NR7 a crucial pattern for price action traders.
NR7 Pattern: Daily Candle Chart
Past performance is not a reliable indicator of future results
Why is NR7 So effective?
The NR7 pattern leverages the cyclical nature of price compression and expansion. Markets often go through periods of low volatility (price compression) followed by high volatility (price expansion). Recognising these cycles can provide traders with significant advantages. Here's why this is important for trading:
Predicting Trend Days: An NR7 condition sets the market up for potential trend days. Following an NR7 day, there is a higher probability that the next session will have a larger than normal range and more directional intraday action. This helps traders anticipate significant moves.
Timing Entries: By identifying periods of price compression, traders can time their entries more effectively. Entering trades as the market transitions from low volatility to high volatility can create trade setups that have attractive levels of risk-to-reward.
The Potential for Multi-Day Expansion
An NR7 pattern doesn't just signal potential moves for the following day; it can also precede multi-day expansions. When a market breaks out of a narrow range, the subsequent move can extend over several days. This provides opportunities not only for intraday traders but also for swing traders looking to capitalize on extended trends.
NR7 Pattern’s Leading to Multi-Day Expansion: Daily Candle Chart
Past performance is not a reliable indicator of future results
Combining NR7 with Other Indicators
While effective on its own, the NR7 pattern becomes even more effective when combined with other technical indicators. Here are a few ways to enhance its use:
Support and Resistance Levels: Identifying key support and resistance levels can help set realistic targets and stop-loss levels. A breakout from an NR7 pattern that also clears a significant resistance level can indicate a strong move.
Keltner Channels: Keltner Channels wrap 2.5 ATR’s (average true ranges) around a 20 period exponential moving average (basis). NR7 day’s that form near the basis of the Keltner Channel can often lead to a break into the upper or lower channel.
Compression Patterns: NR7 day’s can often be part of multi-day compression patterns such as bull flags, ascending triangles, and wedge patterns. Always view the NR7 day within the context of the bigger picture pattern.
Momentum Indicators: Indicators like the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) can help gauge the strength and sustainability of the breakout. If these indicators are in alignment with the breakout direction, it adds another layer of confirmation.
Example: FTSE 100
Before: FTSE 100 Daily Candle Chart
The FTSE 100 forms two consecutive NR7 daily candles beneath a well-defined area of resistance. Collectively the candles are part of a small ‘bull flag’ pattern which is forming near the basis of the Keltner Channel, and the RSI indicator is holding above 50.
Past performance is not a reliable indicator of future results
After: FTSE 100 Daily Candle Chart
In the days that followed, the FTSE 100 index moved higher – breaking out of the NR7 ranges, the bull flag, and above resistance. The breakout saw the RSI indicator surge above 70 and prices push into the upper Keltner Channel.
Past performance is not a reliable indicator of future results
Conclusion
The NR7 pattern is an effective yet simple tool that has the potential to enhance your trading strategy. By recognising periods of price compression and anticipating subsequent expansions, traders can position themselves for potential trend days and multi-day moves. Combining NR7 with other technical indicators can provide additional confirmation and improve the accuracy of your trades.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80.84% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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