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Trading NR7 setup

Discuss Trading NR7 setup at the Advanced Trading Strategies within the Traderji.com; Just initiating this thread to discuss possible expansion setup 1) What is NR7 pattern (Narrow ...


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  #1  
Old 17th June 2009, 04:38 PM
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Default Trading NR7 setup

Just initiating this thread to discuss possible expansion setup

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.

note - This thread is about NR7 SETUP, it is not a complete trading system (though I have given ideas about how to develop a trading system using this setup). Refer to following post to understand the difference between SETUP and TRIGGER.
http://www.traderji.com/swing-tradin...tml#post439859


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Last edited by AW10; 2nd June 2010 at 09:48 PM. Reason: Add how to find NR7 section..
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  #2  
Old 17th June 2009, 04:40 PM
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Default Re: Trading NR7 setup

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.
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  #3  
Old 17th June 2009, 04:40 PM
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Default Re: Trading NR7 setup

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..

Happy Trading.

Last edited by AW10; 17th June 2009 at 08:10 PM.
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Old 17th June 2009, 04:43 PM
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Default Re: Trading NR7 setup

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.>

===================
Happy Trading.

Last edited by AW10; 26th September 2009 at 05:09 PM.
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  #5  
Old 17th June 2009, 04:44 PM
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Default Re: Trading NR7 setup

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.

Happy Trading.

Last edited by AW10; 2nd December 2010 at 08:24 PM.
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Old 17th June 2009, 07:59 PM
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Default Re: Trading NR7 setup

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
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  #7  
Old 17th June 2009, 10:28 PM
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Default Re: Trading NR7 setup

MR Pride will u give me an example how to trade the NR7 strategy pls explain it hope to hear soon

regards
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Old 17th June 2009, 10:35 PM
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Default Re: Trading NR7 setup

Quote:
Originally Posted by AW10 View Post
Just initiating this thread to discuss possible expansion setup

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 385 in next 2 days.  Notice the range expansion.
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.
thank you AW10 for such a simple and powerful setup, will try this next week. few questions

any scanner or excel to give NR7 stocks everyday?

does this work better for most liquid nifty stocks? what about futures? somtimes spot prices may have some reak quotes which will spoil the range. futures have less probability

does this work better on a failed trade? for example RIL has NR7 day, broke out of high but immedietly hit low and stoploss, now we have a SAR and this SAR would work better. because its hard to have 2 failed breakouts consequitivly. so should we look for such oppotunities of failed breakouts and trade them ?

any backtest results?

for buying in cash (not options) should we initiate the trade around 3:15 of NR7 formation day or wait for next day, what happens if the next day gapup is beyond prev day high?

any plan to hanhol us thru some paper trades for couple of weeks until we know the system better while orming the entry, exit rules? i can volunteer to help

traling stoploss till what level? should we close the trade after X percent profit and move to next trade?
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  #9  
Old 18th June 2009, 03:46 PM
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Default Re: Trading NR7 setup

Quote:
any scanner or excel to give NR7 stocks everyday?
It is pretty easy to do this in excel with simple formulas. I am attaching the file with this post.

Quote:
does this work better for most liquid nifty stocks? what about futures? somtimes spot prices may have some reak quotes which will spoil the range. futures have less probability
I have used it on NIFTY. It does work well on lower volatility instrument /chart timeframe..
In case of high volatility stocks, u might have many Outside day taking away the stops on the day of entry. For such stocks, I will look at higher timeframe so that charts are bit more smooth (say weekly chart),
But the concept of market going thru contraction / expansion is universal. I have observed this pattern on all charts ranging from other global indices to commodities and forex.
It doesn't suit smaller timeframe (say 5min, 15 min) because charts are not so smooth and it is easy to get false wicks on candle there.

Quote:
does this work better on a failed trade? for example RIL has NR7 day, broke out of high but immedietly hit low and stoploss, now we have a SAR and this SAR would work better. because its hard to have 2 failed breakouts consequitivly. so should we look for such oppotunities of failed breakouts and trade them ?
In case of failed trade (i.e. in the morning, NR7 Low was broken on downside, and later the NR7 was taken away.
This is classical care of engulfing day.. and certainly, I will play with second break.

In this post, I have mentioned about how to play the breakout.
http://www.traderji.com/technical-an...tml#post307876

Quote:
any backtest results?
Backtesting comes up only when we define the complete system rules around it. I have my system around this. Would prefer to develop new system by involving TJ member rather then giving my system here (I strong belive in "teach a man to fish.. ").

Quote:
for buying in cash (not options) should we initiate the trade around 3:15 of NR7 formation day or wait for next day, what happens if the next day gapup is beyond prev day high?
Buy in cash on 3.15 pm on NR7 is risky.. cause u don't know the direction of breakout. By buying, u are anticipating that it is going to be bullish break tomorrow. In many cases, market can make runaway gap after such strong contraction.

I am not in favour of such trading (my personal choice). That is why I suggested this 3.15 pm approach with direction neutral option strategy.
If someone wants this, or u have other signals that support bullish trend tomorrow then one can take that call.

Quote:
any plan to hanhol us thru some paper trades for couple of weeks until we know the system better while orming the entry, exit rules? i can volunteer to help
Thanks a lot for volunteering. Bandlab2. Sincerely appreciate it.
Keep posting your doubt/questions here so that others can also benefit from it.
Others, don't leave everything to bandlab and me but jump-in and benefit from this. Probably, you won't find the kind of learning that this system development will give you here. If someone wants, then this testing can be taken up for stocks, commodity, Sector indices etc.

This setup occurs approximately 2 to 3 times in a month on NIFTY but it is worth trading.

Quote:
traling stoploss till what level? should we close the trade after X percent profit and move to next trade?
There are many different ways to chase a trend with trailing stoploss. For a daytrader this could be based on pivot high/low at 60min TF on day 1 but start tightening on day 2 or later to 30min PH/PL.
For swing trader, Prev days / H/L is good and simple enough.

In my view, when we use trailing stoploss, we leave some profit on the table. And all of us have different psychological preference for that. So there is no 1 answer for this.
Personally, I don't like to cut my profit so not in favour of closing all breakout trades quickly . At the same time, there is expected gain in our trading timeframe where I would like to take take partial profit or lock profit by using options.

Happy Trading.
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  #10  
Old 18th June 2009, 04:17 PM
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Default Re: Trading NR7 setup

If Yu Create Pofir Loss and SL-Triggred Excell **** that's good ...For Tracking this System

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