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Written and copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved.
(NR4) looks for today’s high-low price range to be narrower than
any of the prior 3 days. It is the narrowest of the four days.
The NR7 is similar to the NR4. It is a narrow range pattern based on the high-low
price move that is the smallest of the prior 6 days. When an NR7 occurs, it means
that today’s price is the narrowest of the 7 days.
I use the NR7 in the chart pattern indicator because it gives good results. Click
here for more information on the chart pattern indicator.
NR4: Narrow Range 4
The chart shown on the right illustrates the many narrow range 4 (NR4) patterns that can occur in a randomly selected stock. Shown
are all of the patterns on the daily scale. Each red dot represents the last day -- the narrowest --
of the four day pattern.
The thinking behind the pattern is that price volatility is a spring being wound, and the spring is the height of the
price bar. The smaller the height, the tighter the spring. The direction of the coming release cannot
accurately be predicted, but the move is sometimes a violent one.
Price
volatility drops at completion of the pattern (meaning a short price bar appears) and within a day or two, price should make a large move,
either up or down. Whether or not that actually occurs in the chart and in other tests, I will leave up to you to decide. Bollinger bands highlight a similar situation,
but they use standard deviation of price as the volatility measure.
Patternz,
my free pattern recognition program, highlights NR4 patterns at the start of the pattern, not the end, but you
can use it to find NR4 and NR7 patterns. The easiest way to do that is to use the List feature because it tells you the start
and end date and highlights each pattern by itself, on its own chart.
NR7: Narrow Range 7
The chart to the right shows the NR7 chart pattern (narrow range 7). Notice how there are fewer patterns than in the
previous chart, as one would expect. The chart covers the same stock, the same period, on the same scale.
Again, the NR7 is supposed to highlight days of low price volatility, ones that often predict a larger
price move within a day or two after the pattern completes. The NR7-2 is supposed to be a more potent version of the narrow range 7.
It occurs when the next day is also shorter than any of the prior 7.
Chart Pattern Indicator Use of NR7
The chart pattern indicator uses the narrow range 7 chart pattern to signal market turns.
It does this not by trading in the direction of price after the pattern completes, but instead it looks for
the breakout. Patternz defines the breakout as a close above the top of the pattern or a close below the bottom of
the pattern. The top and bottom use the 7 days, from start to end, of the NR7. Since the breakout method works so well for the
chart pattern indicator, it might be used to effectively trade the NR7 pattern.
Trading the NR7
As mentioned above, you might try trading the NR7 by waiting for price to close above the top of the highest high during
the prior 7 days or close below the lowest low in the NR7. The chart pattern indicator uses that
technique in hundreds of stocks to reliably signal market turns.
Another method is to use the last day of the NR7 as a trading signal. Place an order to buy a penny above the
top of the last day, or go short a penny or two below the low of the last day, respectively. Whichever order triggers,
cancel the other order and replace it with a stop loss order. Ride price following the new trend until the swing ends.
Other Examples
-- Thomas Bulkowski
Copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved. If it isn’t broke, fix it until it is.
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