Narrow Range Trading Strategy

Table of Contents

Narrow Range trading strategy is a breakout-based method that assumes that the price of security trends up or down after a brief consolidation in a narrow range. The default lookback period of this strategy is 7 days which means that if the price range of any particular days is lowest as compared to last 7 days, then that day is termed as NR 7 day. Similarly, if the price range of any particular days is lowest as compared to the last 4 days, then that day is termed as NR 4 day.

The day following NR 4/NR 7 day acts as a confirming factor on where the price will move further. Breakout of NR 7 candle with high volumes indicates bullishness, while the breakdown of NR 7 candle indicates bearishness. Observing this pattern gives day traders /swing traders a distinct edge to trade the next few days. It gives you a chance to be ahead of trade followers/indicator followers who will jump in the trend after you.

The philosophy behind the pattern is to track volatility contraction which is often followed by a volatility expansion. Narrow range days mark price contractions that often precedes price expansions.

Narrow Range 4 (NR 4) & Narrow Range 7 (NR 7)

Narrow Range 4(NR 4) and Narrow Range 7 (NR 7) is a trading strategy that helps to track bullish and bearish stocks when the narrowest range (shortest candle) occurs, it is a sign that volatility has contracted and the stock is now ready for a break out on either side (up or down). Range means the difference between days high and days low. For example, if today’s high- today’s low is smallest of last 6 days high-low (range) today is NR 7 day and if we take this for 4 days, it’s NR 4 day when today’s range is smallest in last 4 days(including today).

To trade with NR 4/NR 7 stocks, Mark high and low of NR 4/NR 7 days as resistance and support. If the stock breaks up or down the high or low of NR 4/NR 7 candles, Buy or sell accordingly. Stop loss will be the Low of NR 4/NR 7 candles when you buy and high of NR 4/NR 7 candle when you sell.

See also: Using My Combination Scan to Identify best in an Industry

Using Narrow Range in StockEdge App:

Above we have discussed the Narrow Range, now let us discuss how we can use this technical indicator to filter out stocks for trading:

In StockEdge there are six Narrow Range scans available for filtering out stocks for trading:

Let us discuss in details about some of these scans:

NR 4 Breakout :

It is a bullish indicator that shows Stocks which has qualified for NR 4 scan on the previous day and has a gap up opening the following day i.e. closes above the high of NR 4 day candle on the current day. It is an excellent strategy to filter out stocks that are a good buy opportunity.

Following is a list of stocks which has fulfilled this criterion on 17^th July:

NR 4 Breakdown :

It is a bearish indicator that shows Stocks which has qualified for NR 4 scan on the previous day and has a gap down opening the following day i.e. closes below the low of NR 4 day candle on the current day. It is an excellent strategy to filter out stocks that are a good sell opportunity.

Following is a list of stocks which has fulfilled this criterion on 17^th July:

NR 7 Breakout :

It is a bullish indicator that shows Stocks which has qualified for NR 7 scan on the previous day and has a gap up opening the following day i.e. closes above the high of NR 7 day candle on the current day. It is an excellent strategy to filter out stocks that are a good buy opportunity.

Following is a list of stocks which has fulfilled this criterion on 17^th July:

NR 7 Breakdown :

It is a bearish indicator that shows Stocks which has qualified for NR 7 scan on the previous day and has a gap down opening the following day i.e. closes below the low of NR 7 day candle on the current day. It is an excellent strategy to filter out stocks that are a good sell opportunity.

Following is a list of stocks which has fulfilled this criterion on 17^th July:

Above are examples of Narrow Range scans that tell you if the stock is bearish or bullish and also give us a list of the stock which fulfils the criteria of the particular day.

You can filter out the stocks and can trade accordingly using these scans.