Trading Setup Tutorials : "INSIDE DAY NR4 (ID/NR4)"

INSIDE DAY NR4 (ID/NR4) TRADE SETUP

Toby Crabel did some serious work on volatility patterns in price movement. The Inside Day/NR4 (ID/NR4) is one of the patterns he wrote in “Day Trading with Short Term Price Patterns and Opening Range Breakout“.

An inside day is one with a lower high and higher low than the previous bar. NR4 is a bar with the narrowest range among the last 4 bars.

Hence, ID/NR4 is an objective criterion for identifying days of decreased range and volatility.

Once an ID/NR4 is found, we trade the breakout as volatility resumes.

TRADING RULES FOR ID/NR4

RULES FOR LONG

1.    An inside bar with the smallest range among the last 4 bars.

2.   Place buy stop order above the high of the bar.

3.   Wait for break-out to trigger order.

RULES FOR SHORT

1.    An inside bar with the smallest range among the last 4 bars.

2.   Place sell stop order below the low of the bar.

3.   Wait for break-out to trigger order.

TRADING EXAMPLES FOR ID/NR4

WINNING TRADE

This chart shows the daily prices of EUR/USD. The green arrow marks an inside day with the smallest range among the last 4 bars (ID/NR4).

We placed a buy stop order placed at the high of the ID/NR4 was triggered the next day. Prices went up for the next few days.

The preceding bullish price action was great for this long position.

1.   The outside bar with a long bottom tail points to buying pressure.

2.   The buying pressure was sustained by the bullish follow through.

3.   The 3 bearish bars before our signal bar was strong but the support from the previous swing low (blue line) held up. The bar that tested the support showed a long bottom tail (buying pressure).

LOSING TRADE

This daily chart of chemical giant DuPont listed on NYSE shows an ID/NR4 (green arrow).

We entered the next day as prices broke the high of the ID/NR4 bar. Prices moved sideways for a few days before stopping us by breaking out of the low of the ID/NR4 pattern.

Dupont was trapped in a range. In a range, we should sell high and buy low. However, the ID/NR4 gave a buy signal at the top of the range.

Let’s take a look at the specifics.

1.    After the break down of prices, a clear double bottom was formed.

2.   Prices bounced off the double bottom with bullish action.

3.   This terrible reversal bar (gravestone doji) confirmed that DuPont has entered a range. This single bar should deter most traders from going long until more bullish action unfolds beyond the range (marked by the two blue lines).

REVIEW – INSIDE DAY NR4 (ID/NR4)

ID/NR4 are days with low volatility and small range.

Unlike the Bollinger Squeeze which identifies a drop in volatility over a number of bars, ID/NR4 shows only a single bar contraction in volatility. Accordingly, ID/NR4 is a short-term volatility pattern.

Hence, it is crucial to look at the price action context before taking any trades with ID/NR4. Experiment with a trend filter like a moving average and pay more attention to the price action context.

(Get a free ID/NR4 indicator with a moving average filter here.)

The winning example shows that, given the right context, this pattern is a great low-risk trigger.

However, if the market is in a range, the ID/NR4 pattern might be part of a prolonged congestion. The inside bar might even be a trap. Although We did not include any intraday trading examples, We have observed similar results while day trading.

Courtesy - TradingSetupReview