What is NR7 and what is its significance in trading?
NR7 is the the narrowest bar in the last seven bars. The significance of which is price/volume contraction ahead of expansion. Alan Farley refers to NR7 as a
coiled spring. Therefore, if we look to track NR7, we presumably, can find setups that will provide solid entry points and quick results on the plus side of the P&L.
Actionable NR7 setups usually occur in the congestion zone following a decisive move in one direction or the other. Volatility contracts as many participants move to the sidelines awaiting a signal of
continuation or reversal of the existing trend.
What timeframe to use for spotting NR7?NR7 can be traded on any
timeframe, but the longer the
timeframe, the more meaningful the setup. So using a 15 minute chart for
daytrading NR7 would likely have more meaningful results than a 1 or 3 minute
timeframe. I currently monitor NR7 bars on the
Trade Ideas Scanner which runs on the 15 minute
timeframe. The scan was developed by
Trader Mike for TI, and the archives Mike's blog are a great resource for NR7 trading tips.
So, once NR7 scans spit out a list of candidates, what do we look for as far as actionable trade setups?
It's easier to define your criteria beforehand, rather than using a process of elimination. As we stated earlier, actionable candidates have already made a decisive move and are consolidating that move. So if I'm scanning my usual suspects
watchlist, I want to focus on sectors/stocks that are in or near the top or bottom of their recent trading range, or stocks that have already broken out and are forming a base such as a handle or flag through price/volume contraction.
How do the key moving averages come into play?In reference to the 15 minute
timeframe -
- avoid trading NR7 if the 50 SMA is flat and close to price. Why? By my definition, the 50 SMA defines the broader trend and a flat 50 SMA means the stock has no trend. The closer it is to price, the more likely the stock has little or no pulse. Therefore, in this case, it's better to wait for price to make a move before jumping in;
- in the a.m. (EST) look for proximity to the rising/declining 5 period EMA;
- in the p.m. look for proximity to the 20 EMA if you spot am ambush-like setup.
How do we define the bar count to determine a real NR7? The TI scanner has a continuous count from one day to the next. If a stock had a series of
NRBs at the end of the previous day, we likely won't print NR7 on the scan until the 7
th bar. How practical is this? It may not be practical for
gappers, so we have a second, work around, strategy for
gappers -
NRIBs (narrow range inside bars), again in very close proximity to the sloping 5 period EMA. The sweetest setup of all is the
NRIB (NR7).
Let's look at some examples of NR7GXDX, from the TI
pre-market gap scan, printed
NRIB NR7. The way I trade these is to place a buy stop order above the outside bar. Once the trade executes, I place a stop pennies below the outside bar.
GXDX is an example of NR7 in the context of a gap trade. I didn't trade it.
GG was a NR7 from the TI scanner on Friday.
AEM,
NEM and
GG all printed NR7 at the same time.
AEM had already filled it's gap, so I entered long
GG and
NEM.
RIMM is a trade from June 19
th following a disappointing earnings report. The
NRIB sets up at the base (handle) of an inverse C&H pattern.
All of these setups meet the primary criteria:
- consolidating after a decisive move;
- close proximity to sloping 5 period EMA;
- NR7 price and volume contraction;
- easily identifiable base or chart pattern.
On days where the markets gap and run, the
NRIBs usually setup within the first hour, so keep that in mind as well. Running the TI NR7 scan on the entire universe of stocks (even with filters) is a waste of time because many of the candidates will be anemic, flat liners. Best to use the TI NR7 scan in the context of a WL and/or as an add on to pre-existing scan either gaps or breakouts. As an add on, the first criteria is already met before it prints NR7. The WL is usually small and manageable, and presumably you've done the homework and already have a focus list.
Related posts:
NRIBs RevisitedN.B. - TI scanner does not currently have a scan for NRIBs, this part is done purely through eye balling.
The markets opened the new week/month on a modestly favorable note. Positive news/data from overseas and better than expected construction spending and ISM kept buyers busy. Despite the choppy session, the S&P and NYSE notched new highs, unconfirmed on the NASDAQ. The rally was broad based with energy/commodities leading the way on a weaker $USD.
Speaking of the $USD, it breached support on a closing basis, however, the lower low is unconfirmed by the MACD and RSI. Same goes for the $CAD which gapped higher. I suspect this may be a head fake. If so the commodity rally will stall. Watching this one closely.
Two trades from the WL, CNQ gapped up on weak $USD, but broke the ORH way too soon as measured by distance between price and the rising 5 period EMA. Wait for a better entry.
